Brazil's Economic Crossroads: Assessing Long-Term Risks to Foreign Investment and Fiscal Sustainability Under High Interest Rates

Brazil's economy stands at a critical juncture in 2025, grappling with a slowing growth trajectory amid an aggressive monetary tightening cycle. The Central Bank of Brazil has maintained the benchmark Selic rate at 15% for three consecutive quarters, a historic level aimed at curbing inflation, which remains stubbornly above the 3% target at 4.68% year-over-year as of October 2025 according to Bloomberg. This high-interest-rate environment, while effective in stabilizing price pressures, has come at a cost: the Finance Ministry recently revised its 2025 GDP growth forecast downward to 2.2%, down from 2.3%, reflecting weaker-than-expected third-quarter performance. The interplay of these factors raises pressing questions about the long-term sustainability of Brazil's fiscal policies and their implications for foreign direct investment (FDI).

Fiscal Sustainability Under Strain

The most immediate concern lies in Brazil's ballooning public debt. By September 2025, the public debt-to-GDP ratio had climbed to 78.1%, the highest level since November 2021, driven by interest accruals and net debt issuance. Analysts project this ratio will reach 82% by year-end and could surpass 90% by 2027 according to Trading Economics. Compounding this issue is the soaring cost of servicing the debt: with the Selic rate at 15%, Brazil's 12-month average debt servicing cost hit 11.6% in late 2025, straining the federal budget and increasing the likelihood of future tax hikes or abrupt fiscal adjustments.

While the government claims to be on track to meet its 2025 primary deficit target of zero (with a tolerance margin of 0.25%), critics argue this falls far short of what is needed to reverse the debt trajectory. Goldman Sachs has warned that a primary surplus of at least 2.5% of GDP is required to stabilize public finances. This fiscal fragility, coupled with the Lula administration's expansionary policies-such as expanded income tax exemptions-risks reigniting inflationary pressures and prolonging high interest rates.

Foreign Investment: A Mixed Landscape

High interest rates and fiscal uncertainty have created a complex environment for FDI. While the construction sector-particularly in logistics and renewable energy-remains attractive due to long-term growth potential and government incentives, broader macroeconomic headwinds persist. For instance, rising inflation and material costs have slowed residential and commercial construction projects, with developers increasingly favoring multi-use developments to mitigate risks.

Regulatory shifts further complicate the outlook. Recent changes to Brazil's Workers' Food Program, including caps on merchant commission rates, have introduced operational uncertainties for foreign firms, as seen in the revised fiscal 2026 outlook of companies like Pluxee. These reforms, combined with high borrowing costs, could deter capital inflows by eroding profit margins. However, sectors such as energy exploration remain resilient; TGS continues to commit to offshore projects in Brazil despite the challenges.

The Path Forward: Balancing Act

For foreign investors, Brazil's current economic landscape demands a nuanced approach. On one hand, the country's strategic focus on infrastructure and renewable energy offers compelling opportunities. On the other, the risks of fiscal overextension and prolonged high interest rates cannot be ignored. The Central Bank's insistence on maintaining 15% rates until inflation is firmly under control-potentially delaying rate cuts until early 2027-adds to the uncertainty according to Bloomberg.

In the long term, Brazil's ability to attract FDI will hinge on its capacity to implement structural reforms that address regulatory inefficiencies, streamline environmental permitting, and reduce debt servicing burdens. Without such measures, the nation risks locking itself into a cycle of high borrowing costs and fiscal fragility, deterring the very investments needed to fuel sustainable growth.

Conclusion

Brazil's 2025 economic narrative is one of resilience amid adversity, but the path forward is fraught with challenges. While the government's fiscal targets and sector-specific incentives provide some optimism, the overarching risks-soaring public debt, high servicing costs, and regulatory volatility-pose significant hurdles for foreign investors. As the global economy remains volatile, Brazil's success in navigating these crosscurrents will depend on its ability to balance short-term stability with long-term structural reform.