The Return of the Bolsonaros

Dear all,

We welcome you to the Greater Caribbean Monitor (GCaM).

Across the region, administrations are discovering that political narratives are no longer enough to offset economic realities, while external powers are reshaping the strategic environment in which those decisions are made. This edition examines three examples of that broader transformation. In Brazil, record credit delinquency exposes the growing tension between electoral incentives and macroeconomic discipline, as the government attempts to sustain consumption through subsidized lending despite persistently high interest rates. Across the region, Chinese investment patterns reveal a far more selective and strategic approach than in previous decades, concentrating capital on critical minerals, energy assets and industrial supply chains that will underpin long-term geopolitical competition. Meanwhile, North America is entering a new trade era after Washington declined to renew the USMCA, replacing the stability of long-term institutional commitments with annual negotiations that give the United States greater leverage over both Canada and Mexico.

Taken together, these developments point toward the same conclusion. The region is becoming progressively more integrated into the strategic competition between great powers while simultaneously confronting its own domestic structural weaknesses. The result is a political economy in which credit markets, foreign investment and trade agreements are no longer merely economic instruments, but central tools of geopolitical statecraft.

In this issue, you will find:

• The Friction Behind Brazil’s Record Credit Delinquency

• China’s Cumulative OFDI to Latin America and the Caribbean

• The Structural Overhaul of Honduras’ Energy Matrix

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As Brazil approaches its October 2026 general election, the Lula da Silva administration is aggressively leveraging credit mechanisms to sustain household consumption and defend its political coalition. At the same time, the country is grappling with record-high credit delinquency rates, driven by a prolonged period of restrictive monetary policy.

• This dynamic creates a profound tension between short-term electoral incentives and long-term macroeconomic stability.

In perspective. Brazil’s structural economic landscape has long been trapped in a cycle in which consumption is simulated through state-backed credit rather than fueled by organic productivity gains. The current scenario echoes previous developmentalist experiments, in which the executive attempts to bypass the price signal of high interest rates by engineering parallel, subsidized credit channels. By treating liquidity not as a scarce reflection of time preference and real savings, but as a political instrument to sustain aggregate demand, the government obscures the underlying erosion of purchasing power. This artificial expansion temporarily insulates lower-income households but embeds systemic vulnerabilities into private bank balance sheets and public finances.

• State-backed credit interventions such as the Novo Desenrola program act as temporary patches for an economy constrained by a 14.25% central bank policy rate.

• Total credit delinquency reached a record 4.7% in May 2026, revealing the structural limits of using debt to mask inflation-driven purchasing power erosion.

• Heavy reliance on government guarantees converts private default risk into rising contingent liabilities for an already strained federal budget.

How it works. The structural friction is clearly visible in the widening divergence between non-earmarked, market-priced credit and government-directed lending. While the Central Bank keeps interest rates elevated to anchor inflation expectations, the executive branch is simultaneously expanding subsidized credit lines for informal workers and financially distressed households. This creates a fragmented financial system in which risk pricing becomes detached from market realities, weakening the transmission of monetary policy. The immediate result is a credit market under severe strain, with delinquency peaking precisely in the unsecured consumer segments that underpin mass consumption.

• Delinquency in non-earmarked credit reached a historic high of 6.2% in May 2026, driven by a 14.2% default rate on unsecured personal loans.

• In response, the government launched subsidized credit lines capped at a 1.99% monthly interest rate, targeting up to 500,000 informal workers ahead of the October election.

• Private lenders are steadily retreating from higher-risk borrowers, with approvals for non-earmarked credit declining while government-directed lending expanded by 13.3%.

Between the lines. Beneath the surface of these credit relief programs lies a sophisticated mechanism of electoral insulation and risk shifting. Lula’s administration is deploying these targeted financial lifelines to shore up the material conditions of its core lower-income and informal voter base, which remains particularly vulnerable to macroeconomic shocks. However, this strategy creates an adverse-selection spiral across the broader financial system while leaving private banks to shoulder a growing stock of unresolved liabilities. If the opposition, led by Flávio Bolsonaro, wins the election—or if fiscal realities force a rebalancing in 2027—the state will have little choice but to allow credit markets to adjust to the distortions created by artificially subsidized lending. The resulting contraction is likely to trigger a painful deleveraging process—though not one approaching systemic crisis—as the economy absorbs the misallocation of capital generated during the pre-election expansion.

• The policy functions as a targeted electoral shield for Lula’s political base, while credit stress among Bolsonaro-leaning business owners remains largely unaddressed.

• Subsidizing consumption while inflation remains above target forces the Central Bank to maintain high interest rates for longer, deepening the structural default trap.

• A post-election correction will require a sharp contraction in credit to realign lending with genuine capital reserves and fiscal capacity, potentially weighing on Bolsonaro’s first year in office should he win the election.

In conclusion. Brazil’s pre-election credit expansion functions as a high-stakes attempt to buy political time at the expense of future financial stability. By replacing market-based risk assessment with politically backed guarantees, the administration has merely postponed an inevitable process of structural deleveraging. Whether through a renewed Lula administration forced into fiscal adjustment or a Bolsonaro government overseeing a sharp market correction, the post-2026 landscape is likely to face a significant economic cooling.

• Ultimately, using credit flows as an instrument of electoral survival cannot permanently override the arithmetic of fiscal constraints and monetary reality.

The shifting paradigm of global trade has repositioned Latin America and the Caribbean as a critical frontier for Chinese geoeconomic strategy. Beijing’s Outward Foreign Direct Investment (OFDI) reflects a deliberate distribution of capital across the region, moving away from broad-based financing toward structural asset ownership.

• This deployment of resources targets specific countries and sectors to secure critical supply chains amid intensifying global competition.

In perspective. China’s economic strategy in Latin America has undergone a profound transformation over the past two decades. Initially, Beijing relied heavily on state-backed sovereign lending to politically aligned—but often financially unstable—governments, as Venezuela vividly demonstrated. That approach frequently produced overleveraged partners and significant default risks. Today, China has largely shifted toward direct equity investments and corporate acquisitions focused on strategic infrastructure and critical commodities. The result is a transition from politically motivated lending to a more pragmatic, state-directed strategy designed to secure long-term industrial resilience.

• The original model shifted away from high-risk government-to-government lending toward direct corporate equity and physical asset ownership.

• Current investment flows prioritize countries with stable regulatory environments capable of supporting long-term resource extraction.

• China’s regional strategy increasingly emphasizes resource security over ideological alignment.

The essentials. The data presented in the graphic illustrates a highly concentrated pattern of Chinese cumulative OFDI, overwhelmingly directed toward South America’s largest economies and resource-rich countries. Brazil leads the region with USD 70.1B, followed by Peru with USD 37.5B and Mexico with USD 26.5B, highlighting where Beijing has anchored its long-term interests. This geographic pattern is mirrored by sectoral investment between 2020 and 2025, where extractive industries dominate. Of the USD 66.43B invested during that period, mining and energy alone accounted for more than 70% of total inflows, underscoring China’s clear strategic priorities.

• Brazil remains China’s principal regional destination, attracting USD 70.1B in cumulative investment—nearly twice that of any other country.

• Mining and energy dominate recent investment flows, with USD 25.8B and USD 20.9B respectively.

• Manufacturing is beginning to play a larger role, particularly in the automotive sector, which captured 13.2% of recent investment.

Between the lines. China’s investment map closely mirrors the strategic needs of its domestic economy. By acquiring stakes in mining, energy, and infrastructure projects across Peru, Chile, Argentina, and Brazil, Beijing is reducing its dependence on global commodity markets and securing direct access to the inputs required for its industrial base. Mexico presents a more complicated picture. Chinese investment linked to nearshoring increasingly collides with Washington’s efforts to tighten North American supply chains. The US decision to reject a clean 16-year renewal of the USMCA and instead move toward periodic reviews significantly raises the political risk facing Chinese manufacturers operating inside the North American trade bloc.

• Peru and Chile have become critical upstream suppliers of copper and lithium for China’s high-tech industries.

• Brazilian agriculture and energy investments provide an important hedge against maritime disruptions and potential Western sanctions.

• The USMCA’s shift toward regular reviews increases uncertainty for Chinese investment in Mexico, making trade compliance an increasingly geopolitical issue.

In conclusion. The distribution of Chinese investment across Latin America reflects a broader shift from commercial presence to long-term strategic positioning. By concentrating capital in mining, energy, and increasingly in manufacturing, Beijing is securing the raw materials and industrial inputs needed to sustain its global economic ambitions. For Latin American governments, these investments provide much-needed capital and infrastructure, but they also deepen dependence on commodity exports within an increasingly contested geopolitical landscape.

• As competition between China and the United States intensifies, these investment corridors are likely to become some of the region’s most important strategic fault lines.

The United States’ decision not to renew the United States-Mexico-Canada Agreement (USMCA) marks the beginning of a new phase in North American trade. Rather than extending the agreement, Washington has opted to place the bloc under rolling annual reviews until its scheduled expiration in 2036. The move reflects a broader shift away from stable, rules-based integration toward a more flexible framework in which trade policy becomes a recurring source of political and economic leverage.

• Frustrated by persistent trade imbalances and what it sees as insufficient strategic alignment from its neighbors, the Trump administration is increasingly treating market access as a bargaining tool rather than a permanent guarantee.

In perspective. North American trade has entered a new paradigm in which economic integration is increasingly subordinated to strategic interests. When the USMCA replaced NAFTA, it was presented as an updated version of a rules-based trading system. Today, Washington appears to view long-term trade agreements less as engines of mutual prosperity than as constraints on its ability to pursue industrial and geopolitical objectives. As great-power competition intensifies, the administration has become more willing to use America’s dominant market position to influence the economic and political decisions of its closest trading partners.

• Annual reviews introduce a permanent layer of uncertainty that reshapes investment decisions and increases Washington’s negotiating leverage.

• Rather than treating Canada and Mexico as equal commercial partners, the United States is increasingly using access to its market to advance broader industrial and strategic priorities.

• The shift reflects a broader move away from traditional free-trade assumptions toward a more transactional model of economic statecraft.

The empirical reality. The immediate justification for this policy lies in persistent trade imbalances. Despite the implementation of the USMCA, the US trade deficit with Mexico expanded from roughly USD 111B in 2020 to nearly USD 197B in 2025, while the deficit with Canada reached USD 48.3B. Whether or not those figures fully capture the benefits of regional integration, they have become a powerful political argument in Washington for rethinking the existing framework. The asymmetry is reinforced by the overwhelming dependence of both partners on the American market: roughly 73% of Canadian exports and 82% of Mexican exports are destined for the United States.

• The export dependence of both neighbors gives Washington considerably greater tolerance for trade disruptions than either Canada or Mexico.

• Annual negotiations reduce the ability of Ottawa and Mexico City to coordinate common positions, encouraging bilateral rather than regional bargaining.

• Rather than accepting persistent trade deficits as a feature of integrated supply chains, the administration increasingly views them as evidence that further industrial adjustments are necessary.

Between the lines. Trade deficits alone do not explain Washington’s approach. The broader objective appears to be aligning North American production with US strategic priorities while limiting external influence over regional supply chains. Canada and Mexico have each taken decisions that have generated friction in Washington. Ottawa has pursued a strategy of expanding trade beyond the United States while easing restrictions on Chinese electric vehicles. Mexico has benefited from the nearshoring boom but has resisted several US security initiatives, including Treasury sanctions targeting individuals linked to the Cartel Jalisco Nueva Generación. Against that backdrop, recurring USMCA reviews provide Washington with a mechanism to continuously pressure both governments without formally abandoning the agreement.

• Canada’s efforts to diversify trade and its evolving approach toward China have raised concerns in Washington about long-term strategic alignment.

• Mexico’s selective cooperation on security and trade issues has reinforced the administration’s preference for maintaining continuous leverage.

• The result is a regional trade framework where market access becomes increasingly conditional on broader geopolitical cooperation.

In conclusion. The decision not to renew the USMCA represents more than a procedural change. It signals that North American trade is entering an era in which political negotiations become a permanent feature of economic integration. Canada and Mexico will continue to enjoy privileged access to the world’s largest consumer market, but that access will increasingly depend on their willingness to accommodate shifting American priorities. For investors, the consequence is a more uncertain policy environment.

• For governments, it marks the gradual replacement of long-term predictability with continuous strategic negotiation.

• Rather than dismantling North American integration, Washington is redefining it on terms that preserve maximum American leverage.