Brazil faces economic headwinds as Lula prepares to take office

Luiz Inácio Lula da Silva was elected president of Brazil by promising voters that the great era of “steak and beer” would return to Latin America’s largest country.

But as the leftist leader prepares to take office on January 1, he faces a bleak economic outlook. Growth forecasts for 2023 have been revised down due to concerns about the impact of high interest rates, financial instability and a global recession.

Alessandra Ribeiro, economist at consulting firm Tendências, said: “When you take all of these factors together, externally and domestically, we see the Brazilian economy decelerating sharply in next year.

Lula presided over a period of strong growth during his first term in office from 2003 to 2010, when a commodity export boom spurred output expansion by 4 to 5 percent a year. Wages rose, the middle class expanded, and millions of Brazilians were lifted out of poverty.

But the incoming president now faces an entirely different environment. While the agribusiness sector remains strong and the unemployment rate has dropped to around 9% – a seven-year low – economy is facing a series of interest rate hikes to curb inflation. The rate of increase to the current level of 13.75% affects growth by restraining consumer consumption and business investment.

“There are clear signs that credit is becoming scarcer and more expensive,” said Marcelo Fonseca, chief economist at wealth management opportunities. “With very high interest rates, we can expect consumption to slow very quickly.”

The economy also remains hampered by profound structural inefficiencies, low wages, and a long-term trend toward deindustrialization.

The government last month revised down its official 2023 growth forecast from 2.5% to 2.1%. However, independent economists are even more pessimistic, with a consensus survey indicating a growth rate of just 0.8%.

“There is a global recession that affects us. But we also have the more pronounced effects of high interest rates and the drying up of the post-pandemic services recovery that has helped the economy so much this year,” Ribeiro said.

She predicts the unemployment rate will fall over the next 12 months, but at a slower rate than this year, possibly ending 2023 at 8.2%.

The main concern for Fonseca and other economists is how the Lula administration approaches fiscal policy. During the campaign, the former union member pledged to increase spending on welfare programs, telling voters that “the wheel of the economy will turn with the poor as part of the budget”.

Brazilian Congress this month passed constitutional amendments that allows the incoming administration to keep the top cash allowance for Bolsa Família, the main social welfare program, at R$600 (US$116) per month by breaking the gender rule spending limit of the country.

The move has raised concerns that the incoming administration may renegotiate its stated commitment to financial responsibility.

Economists fear that investors will leave Brazil if the country’s debt-to-GDP ratio – currently near 80% – starts to soar next year, causing the exchange rate to weaken further and cause inflation. This, in turn, would force the central bank to keep interest rates higher for longer, further constraining growth.

“The outlook for next year is very mediocre,” Fonseca said. “And with loose fiscal policy, I don’t see a stronger rebound in the years to come.”

Gabriel Leal de Barros, partner at Ryo Asset Management, said a loose fiscal policy leading to increased government spending would have multiple knock-on effects and potentially jeopardize a very tax reform. necessary and overdue.

“We will have to raise some taxes or find some money to pay for the expenses. We will not have the space or time to focus on the efficiency and structural issues of the tax system in Brazil,” he said.

“Even the green agenda, one of the best we have, depends on financial solvency guidelines and the debt-to-GDP trajectory.”

However, economists also say there are reasons to be optimistic, despite the challenges Lula faces. Agribusiness, which accounts for nearly 30% of GDP, is expected to remain solid next year.

Foreign investors also have demand for infrastructure concessions, such as roads and airports, which has exploded under Jair Bolsonaro’s administration. “[This] can hold investments for a short time,” according to Fonseca.

Ribeiro from Tendências said she believes Brazil could also be boosted if Lula succeeds in boosting diplomatic ties with key trading partners and eventually passes the delayed EU-Mercosur trade deal. long postponed.

“Improving our international relations, with the possibility of bailing out the EU-Mercosur deal, will significantly improve expectations, not only in the short term but also in the medium term as more investment is expected .”

Additional reporting by Carolina Ingizza in São Paulo

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