Brazil's Perfect Storm: Incomplete Tax Reform, Currency Crisis, Fiscal Risk Mounting

Brazil closes the first half of 2026 under the weight of a contradiction that is hard to disguise: the economy displays pockets of vitality — auto sales above expectations, Caixa Econômica Federal reaching R$1 trillion in mortgage lending, artificial intelligence startups growing 149% per year according to an AWS survey — even as the fiscal and regulatory framework continues to generate enough uncertainty to drive away capital and erode the country's risk perception abroad.

The exchange rate captures this tension with surgical precision. The dollar closed at R$5.21 on Wednesday, up 0.89% in a single session, driven by the combination of U.S. sanctions against suspects linked to the PCC — classified by the U.S. Treasury as a terrorist organization — and expectations of higher-for-longer interest rates in the United States. The real is down nearly 3% for the month, its worst monthly performance of the year, as investors unwind carry trade positions. Ibovespa futures were trading lower on Thursday at 174,130 points, with the market awaiting the U.S. June payroll report. Valor Econômico itself reports that managers such as Kinea have adopted a more tactical stance toward Brazilian assets, a sign that so-called "Brazil risk" has returned to the center of institutional conversations.

The U.S. designation of the PCC and Comando Vermelho as terrorist organizations adds a layer of operational risk to the domestic financial system. According to Valor, Brazilian banks are weighing even more restrictive policies toward clients, fearing secondary U.S. sanctions. Febraban acknowledged that, without a named list of targets released by the U.S. Treasury, financial institutions cannot know precisely which exposures to eliminate — creating a degree of legal uncertainty that goes beyond the symbolic.

On the fiscal front, the picture is one of overlapping pressures. The delay in implementing the Selective Tax, created by the tax reform, could open a R$10 billion hole in federal revenues during the first three months of 2027, forcing the Lula government to prepare a Plan B whose contours remain undefined. The tax reform itself, though approved after decades of debate, is already revealing its first frictions: according to Folha, taxpayers face growing operational insecurity amid incomplete rules, technological dependency and practical doubts over credits and tax documentation. The Selective Tax has a draft ready but undefined rates — an incompleteness that prolongs uncertainty for businesses. In parallel, the renegotiation of state debts will cost the National Treasury R$347 billion over the next 30 years, according to data obtained by Folha via the Freedom of Information Act — a silent liability that worsens the long-term fiscal trajectory.

Private credit is sending warning signs of its own. Non-performing loans reached 4.7% in May, a historical record since the Central Bank began the series in 2011, with the largest delinquencies concentrated in the most expensive lines — credit card revolving, overdraft and non-payroll personal loans. In private payroll-deducted lending, a line promoted as a social flagship by the government, delinquency reached 7.9%, up 0.4 percentage point in a single month. The formal labor market offers no comfort either: Caged recorded the opening of just 72,900 jobs in May, the worst result for the month since the 2020 pandemic, marking the second consecutive month of negative record.

In the energy and commodities sector, Petrobras navigates between two opposing vectors. Oil production jumped 16.9% in May to 4.3 million barrels per day, the second-largest monthly volume in history, according to ANP. But CEO Magda Chambriard ruled out any rush to pass through the drop in international quotations — which she places at a new plateau of US$72 to US$75 per barrel — to gasoline prices at the pump. Petrobras cut jet fuel prices by 14.5% for July, directly benefiting Gol and Latam, which are expanding their networks during the high season. The coordinated R$0.35 per liter reduction in the diesel subsidy, matched by an equivalent cut at state-owned refineries, neutralized the immediate impact on consumers, but the government has accumulated overdue subsidy installments, already totaling R$2.2 billion paid according to ANP.

On the strategic front, the Planalto has directly assumed coordination of the critical and strategic minerals policy, elevating the issue to the core of the executive branch. In parallel, the government projects reducing dependence on imported fertilizers from 87.3% to 34.9% by 2050, with Nova Engevix and China's Powerchina winning R$1.8 billion in contracts to restart Petrobras's fertilizer plant in Três Lagoas. Grupo Rima, a magnesium producer, plans to expand production by 20% and grow exports to the United States and Japan, taking advantage of supply chain diversification away from Chinese dependence. On the trade front, the government filed a formal response to the USTR arguing that the 25% tariffs foreseen under Section 301 harm American interests themselves and that Pix does not discriminate against foreign companies — with Minister Márcio Rosa keeping in reserve, but not ruling out, the use of the Economic Reciprocity Law approved by Congress.

The decisive deadline is July 15, when the United States must confirm or suspend the 25% tariffs on Brazilian products. The American response, combined with the June payroll result and a potential revision of the Finance Ministry's official inflation projection — Secretary Débora Freire has already signaled an upward bias to the 4.5% estimate for 2026 owing to El Niño — will determine market sentiment over the coming weeks. Investors will also be watching the nomination of Paulo Picchetti to the Central Bank's Economic Policy directorate, a post that informs Copom's decisions on the Selic rate, and the Senate vote on the provisional measure granting R$15 billion in credit to exporters. Together, these signals will indicate whether Brazil can stabilize perceived risk — or whether the deterioration of recent weeks has room to continue.