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Global Economic Research

"Brazil Is Back" In The Headlines

Brazil’s president, and its problems, are both old and new.

“Brazil is back!” were the words from the newly elected president Luiz Inácio Lula da Silva, after he enjoyed an extraordinary political revival in the October 2022 elections. He didn’t speak only of his own fortune. Brazil has come back to the world stage as a poster child for fiscal and political volatility.

Tensions have been running high in Brazil, in both the streets and the financial markets. Brazil had its own “January 6 moment” last Sunday, as protestors supporting former president Bolsonaro invaded and ransacked the presidential palace, the Supreme Court and the offices of Congress. Financial markets tanked over fears of more interventionist and less fiscally responsible policies pledged by the leftist leadership. The Brazilian real dropped 3.6% against the dollar, and the Bovespa Index fell 5.3% in the first two days of the new regime.

Lula has extended the tax exemption on fuels that was implemented by his predecessor, a move that his finance minister had publicly opposed. Lula is also seeking to remove the already-increased constitutional spending limit. The president has vowed to eradicate poverty and hunger in one of the largest food producers of the world, which also suffers from severe insecurity.

Measures like these would entail huge amounts of spending, thereby stressing already fragile public finances.  The Social Security Minister’s comments suggesting the country’s pension system was not in deficit, despite an accumulated shortfall of $49 billion, has further added to investor concerns over the trajectory of fiscal balances.

Unlike his first two terms in office from 2003 to 2010, President Lula has inherited a country facing significant economic and socio-political challenges, which were aggravated by the policies of the previous administration. Brazil's economic growth has stagnated since 2011, falling behind most countries in the region. Gross domestic product (GDP) per capita has barely grown, in real terms, over the same time period. Its unemployment rate is the highest among major emerging markets (EMs).

Brazil’s public finances aren’t in great shape, either. The annual fiscal deficit stands at 5% of GDP. Government debt remains elevated at 75% of GDP. The tax burden on the economy is substantial, by both historical and EM standards. Inflation is the highest in almost two decades, averaging 9.3% in 2022. This forced Brazil’s central bank to raise rates interest rates from 2% to 13.75% in 18 months. 

Amid a long list of challenges, there are a few positives. A credible and proactive inflation targeting regime ensured that the Brazilian real was the best performing EM currency in 2022. The economy has been reaping benefits from higher prices of commodities, a key source of revenue for Brazil. However, those gains are quickly fading amid weakening global demand and recession fears, which are weighing on commodity prices.   

The new government is seeking to roll back reforms, which is worrying markets.

Prior administrations undertook structural reforms in labor markets and social security, which are evident in an improved business and regulatory environment. Unfortunately, some of Lula’s policies are aimed at reversing those measures. The president seeks to review the investor-friendly pension reform approved by Bolsonaro. The leftist leader has pledged to rely on the state-controlled oil company and the national development bank for boosting economic development.  

Stagnant productivity coupled with high borrowing costs are set to constrain investment and consumption in Brazil, lowering potential growth. A carefully crafted policy platform will be needed if Brazil is to emerge from a prolonged period of stasis. Lula is back, but it remains to be seen if his country can get back to positive economic performance.

Vaibhav Tandon portrait

Vaibhav Tandon

Chief International Economist
Vaibhav Tandon is the Chief International Economist within the Global Risk Management division of Northern Trust. In this role, Vaibhav briefs clients and colleagues on the economy and business conditions, supports internal stress testing and capital allocation processes, and publishes the bank's formal economic viewpoint. He publishes weekly economic commentaries and monthly global outlooks.

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