What's At Stake In Brazil?
Whoever wins the elections and becomes president as of January 1, 2023, will begin their term with the challenge of making a fiscal adjustment (cutting expenses or increasing taxes) or other fiscal actions that will require support from the legislature. The expectation of these actions is for more inflation, higher interest rates and low growth. As Brazil has a “spending ceiling” – an amendment to the constitution – since 2016 and for the next 20 years, in which government spending is limited and corrected for the increase in inflation in the previous year, the next 4 challenging years are expected. For whoever the new president is.
Thus, market expectations regarding Inflation (IPCA), GDP, Exchange and interest rate (SELIC) can and should undergo changes according to the speeches of the pre-candidates and the final result of the elections - which, according to the electoral polls until the moment – should bring Lula back as president of Brazil and indicates an advance of left-wing parties in South America: In June the first left-wing president of Colombia was elected – Gustavo Petro, in 2019 the election of President Alberto Fernandez in Argentina, in Peru Pedro Castillo was elected in 2021, and Chile in 2021 also elected Gabriel Boric. All are also on the left.
Despite this, each country and its new governments are facing challenges after the start of the term. Argentina has accumulated inflation of 60% in the last 12 months and high interest rates. In Chile, the accumulated inflation of 10.5% in the last 12 months brings protests against the ruler – there have not been such bad increases in 13 years in the country.
The possible return of former President Lula brings, of course, hopes mainly to the poorest people due to his policies previously carried out and focused on income transfer, universal access to education, and easy access and low interest rates for home financing, the dream of many Brazilians, in addition to having a global timing that benefited the high price of commodities, the country's flagship, such as soy, iron ore, crude oil, sugar, etc. But regardless of the winner, whoever wins will have a lot of work, and a country and a world that is totally different from 20 years ago.
Regarding the economy, the biggest impacts should be if there is taxation on large fortunes - something that the market is betting that Lula will bring, despite recent speeches by him saying that this will bring a high flight of capital to the foreign market - and taxing profits and dividends, which could slow down the Brazilian stock market and return to encouraging investments in fixed income. If Lula maintains his policy similar to what was done in his first 2 terms, one can expect a policy with high social expenditures, which should increase economic activity and, consequently, the country's employment levels; on the other hand, an increase in interest rates is expected due to the increase in consumption on credit (greater facility for financing, loans). If not well managed, expansionary fiscal policy can be a shot in the foot if it is not efficiently distributed – which justifies the economic downturns since the Dilma government (2011-2016), since the negative effects of poorly formulated policies are not immediate. In conclusion, interest rate increases can either benefit the economy by keeping inflation low or slow growth.
Figure: Expansionary fiscal policy
Meanwhile, with approximately 3 months to go before the presidential elections, the Senate approved a “package of kindnesses” from the current president, due to high inflation and high interest rates that, after 2 chaotic years resulting from the pandemic (in 2022 there was an increase in 11.8% of people registered with the government as extreme poverty reaching 17.5 million families with a monthly per capita family income of R$105 – approximately USD 20).
In this package of kindness, the objectives are: to clear the line for "Aid Brasil" - an income transfer program with an initial value of R$400.00 and which will start this month to be distributed for R$600.00, created in October 2021 to replace “Bolsa Familia,” a famous program during the Lula-Dilma government (PT – Left) especially to help people in extreme poverty or poverty (per capita monthly income between R$105 – R$210).
There is also the R$1,000 truck driver voucher due to the high price of fuel and focused on financially assisting the Brazilian production chain, reduction of IPI - Tax on industrialized products and release of the withdrawal of R$1,000 from the FGTS - Time guarantee fund service for workers.
All changes have a price on the pocket of the country and its tax-paying inhabitants. With the exception of the FGTS, which does not have a cost to the national government, the total of these measures reaches R$110 billion (90 billion related to Brazil aid and 20 billion for IPI reduction), however, with other actions in the package that have not yet taken place, it is estimated that this account can reach R$200 Billion this year.
Since Lula got out of prison after 580 days in prison, still far from the presidential elections that will take place this year, leftist parties have finally won back their most sympathetic and strongest candidate.
Although the country is now and more in the coming months torn between former President Lula (left) and Bolsonaro's re-election (right) there are 10 more pre-candidates running as well, but as polls indicate the third strong candidate would be Ciro Gomes (left) who also tried to be president 4 times before.
Considering this polarization, there is a different future for Brazil in terms of expectations, including investments, public policies, monetary policy, and assistance to the poor. The future is in the hands of the citizens who will vote in approximately 90 days and from then on, a future that is still uncertain for the country will unfold.
I suggest as additional reading the article The attempt to rebuild Brazil where we discuss some of the latest events in the country focused on indicators such as interest rates, inflation, and unemployment.
Edited and Reviewed By Tanish Bagga.