Lula defeats Bolsonaro in an historically narrow election and leaves us with the question: Where to now, Brazil?
Below Nordic Brazilian Capital will guide you through the election results, its effect on the business world and the current state of the Brazilian economy.
By an extremely narrow margin former president Lula seized the victory over current president Jair Bolsonaro on sunday the 30th October 2022. This is going to be Lulas third term as the president of Brazil - but what can we expect from his policies this time around? While Brazil is facing a myriad of problems - from hunger and corruption to the global climate crisis - Lula has identified his old enemy as the number one target: poverty. Many of Lula’s promises are reminiscent of the rhetoric used ahead of his terms in 2003 and 2011. Lula enjoyed great success in his former battles with poverty in the early 2000’s - much supported by a global boom in commodity prices - but can he do it again? And how is he going to do it this time around? We have gathered some of the most likely consequences of Brazil’s political powershift…
Increasing public spending and focusing on more redistributive policies
In his victory speech in the center of São Paulo Lula addressed his main political mission: to combat the economical divide in the country that has sent more than 30 million Brazilian citizens into a hunger crisis and 60 million into poverty. Lula has promised to build affordable houses and bring electricity and water cisterns to secluded villages. With funding from the state banks Lula also intends to initiate major infrastructure projects improving public transportation, energy and water supply. Lula has also stated multiple times throughout the election that the richest should pay more in tax and the poorest should pay less. We can probably expect to see him backing different tax reforms that will unify federal taxes on consumption while also advocating for taxing dividends paid by companys. Lula’s biggest challenge will be the financing of the social policies and we have already seen how Lula is fighting the fiscal spending cap, a rule that limits growth in public spending to the previous year’s inflation. He has stated that he intends to change the way public spending is favoring “fiscal stability” over social policies - a comment that made the Brazilian benchmark stock Ibovespa fall 3.35%.
Continuing and expanding the social programs with cash transfers to the poorest
The former social welfare program Bolsa Familia, which was a cornerstone in Lula’s first term as president in 2006, was replaced by the Bolsonaro program Auxílio Brasil in 2021 in order to combat the economic consequences of COVID-19 pandemic. The program offers the most economically challenged families a monthly payment of 400R$ until the end of 2022. Bolsonaro promised to raise the payments with 200R$ - something that was seen by many as an empty election promise - and Lula now intends to deliver on his rivals promise and even extend the program to combat poverty. Lula has stated that he intends to change the name of the program back to Bolsa Familia and add an extra 150R$ for every child under 6 years of age. The funding plans for this significant expansion of the social welfare is yet to be publicized. It is likely that the expansion of the welfare program first will be possible to finance in the national budget of 2023. Lula has now appointed a transition team in order to prepare a new budget allowing him to deliver on his campaign promises. The team consists of both left-leaning and liberal economists, reflecting the broad coalition that helped him win the election.
Initiating a significant climate plan
In his victory speech Lula announced that Brazil is back and “ready to retake it’s leadership in the fight against the climate crisis”. The restoring of the Amazones has been among the top priorities of Lula’s electoral campaign - and with good reason. In the 4 years under the Bolsonaro administration more than 2 billion trees was cut down or burned by loggers, ranchers and soy farmers, many of them illegally, according to environmental research groups Imazon and MapBiomas. Bolsonaro rejected hosting the COP25 as scheduled and he didn’t show up for the COP26 in Glasgow as a reaction to the international critique of the deforestation in the Amazones. More than half of the Amazonia is located in Brazil and that’s why the election of Lula is a crucial element in the battle against the climate crisis. In a conversation with Scientific American environmental law professor Paulo de Bessa Antunes mourns the lawlessness of the Bolsonaro administration while he’s also being optimistic about Lula’s environmental commitment. Lula has also stated that he intends to create a climate change agency that will be superior to the current structure, where climate change is handled politically in the environmental ministry. Even though Bolsonaro tried to change laws in order to expand the deforestation, he faced great opposition in both congress and supreme court. Bessa Antunes estimates that around 90% of the changes was ruled unlawful by the supreme court. With the protection of the Amazonas comes also the protection of the Indigenous people, whom has been mistreated and undermined by the Bolsonaro administration. Even though the power of agribusiness lobbys still remains and they are fighting for the expansion of soybean and meat production while Brazil also elected a conservative congress, Lula might still have the chance of advocating for a green economy with subsidies for sustainable farming, increasing environmental protection and financial support from carbon credits.
Rebuilding the bridges to the rest of the world
Lula’s return also marks the return of Brazil in a geopolitical context from which Bolsonaro almost isolated the country from. As soon as the result of the election was made clear on the 30th of October congratulatory messages poured in from the world leaders who seemed like they have been eager to become reacquainted with Brazil. The american president Joe Biden, newly elected UK Prime Minister Rishi Sunak, French president Emmanuel Macron and European Commission President Ursula von der Leyen was amongst the first to congratulate Lula on the victory and they all expressed their readiness to work on political solutions - especially in regards to the climate questions surrounding the Amazones. Monday the 1st of November the Norwegian Climate Minister Espen Barthe chimed in and expressed his eagerness to reestablish “the historically good collaboration between Brazil and Norway” before he added that a pool of around 5 billion Norwegian kroner (2.49 billion Brazilian R$) in unused aid was being freed to the Amazon Fund for Forest Conservation and Climate Protection. The funds stems from when Norway halted it’s aid in 2019 after Bolsonaro took power. Also Chinas president Xi Jinping send a congratulatory message where he praised the longlasting China-Brazil relationship. Chinese investments have been flowing heavily to the Brazilian energy and mining sectors for years and there is no reason to believe that Lula will risk anything in regards to this dynamic. It generally seems like the effect of Lula’s return is already making its rounds and Lula’s reputation as a pragmatic peoples champ is working in his favor. At the time of writing the arrival of Lula at the COP27 in Egypt has marked Brazils return to the global fellowship of cooperation. Lula’s benevolent attitude can become the driving force for Brazils foreign relations and economic prosperity in the years to come.
“NBC consider the expected change in the environmental policy from the new administration will have a significant impact for Brazil. Due to the current government’s environmental policy primarily on the Amazon forest, there has been a rapid increase of deforestation in the recent years and politically Brazil has suffered substantial reputational damage globally due to its mismanagement of the Amazonas. From an economic perspective, many foreign investors withdrew capital from the country because of the government’s environmental policy. We expect that President Lula will be able to restore the reputation of Brazil if he suceeds in implementing a sustainable policy towards the Amazon.”
Christian Christensen - Managing Director, Nordic Brazilian Capital
The Brazilian Economy
But how are the state of the Brazilian economy looking on the verge of Lula’s third term? Let’s look at some of the key factors…
REAL GDP
The COVID-19 pandemic left Brazil with a -3.9% GDP growth in 2020 (a 5.1% decline from 2019) and despite a tumultuous time the country managed to bounce all the way back to a 4.62% GDP growth in 2021 (an increase of 8.5%). The GDP in 2021 accounted for 1609 billion dollars - making Brazil the worlds 12th largest economy. The growth rate was attributed to the increase in both service and industry following the ceasing of the need for social distancing. These two sectors alone make up for 90% of Brazil’s GDP. The economic activity in Brazil has continued its upward trend in 2022 albeit with a slower pace and more sectoral diversity. Brazil’s GDP is expected to expand by 2.8% in 2022 and then decline to a 1.0% expansion in 2023 as a result of the global tightening of the financial conditions due to the inflationary pressures and geopolitical turmoil.
INFLATION
The annual inflation rate declined to 7.17% in October from a 8.73% rate in September, making it the lowest measured inflation since april 2021. The last three month of deflation seems to be closely linked to the governments measures to reduce prices by capping state regulated taxes on transport, energy and communication. The general projections sees Brazil’s annual inflation rate go down to around 5.36% in 2023, 3.3% in 2024 and 3% in 2025. The opportunism was challenged when The Central Banks Committee of Monetary Policy made an announcement after their last policy meeting, reaffirming their concerns for the global economic conditions following a tightening of financial strategies in the advanced economies. Recently they also confirmed that they intend to keep the Selic rate (interest rate) at 13.75% per year thereby continuing a strategy of a tight fiscal policy in order to combat possible reactions to a global economic slowdown. The Central Bank inflation target is between 1.75 - 4.75% per year, but for now they are tolerating the higher rates.
PRODUCTION
Brazil’s industrial production has slowly but surely been climbing upwards throughout 2022 culminating with a yearly high in August at +2.8% in comparison to same month last year. September saw an increase of 0.4% in comparison to same month last year and October is expected to land on 0.6%. Brazil is still 2.4% below the pre-pandemic level. Biggest falls in production output was seen in production of food products (-2.9%); metallurgy (-7.6%); petroleum products and biofuels (-2.6%); beverages (-4.6%) and wood products (-8.8%). Increases were seen in mining and quarrying industries (1.8%) and machinery and equipment (2.2%).
UNEMPLOYMENT RATE
The unemployment rate keeps falling and is expected to hit 8.7% in October, which would make it the lowest in seven years. In the three months from end of June through September the unemployed part of the population fell by approximately 1.5 million, equivalent to a 6.2% drop, marking the lowest level since December 2015. It will be absolutely crucial for Lula’s government to keep this momentum going. While the state of Bahia has the highest unemployment rate on 15.5%, Santa Catarina State in the South has the lowest with just 3.9%. Also in unemployment we see a clear divide between the mostly Lula-voting states with high unemployment in the North and the Bolsonaro-supporting states with low unemployment in the South.
TRADE BALANCE
With January as the only month with a negative trade balance in 2022, the latest forecast (3rd of October) expects Brazils trade balance for 2022 to amount to 55.4 billion US Dollars, which would make it the second-highest yearly trade surplus ever recorded for Brazil (2021 with 61.2 billion USD). A drop in the international iron prices and increases in the fertilizer and oil prices makes for a slight decrease compared to last year. September 2022 set records for largest monthly import and export in Brazil’s history - with imports amounting to 24.96 billion dollars and exports amounting to ~29 billion dollars, creating a surplus of ~4 billion dollars. In October the surplus narrowed to a surplus of 3.92 billion USD. The trade surpluses the last few years being mainly due to mining and acricultural products, the largest trade surpluses was recorded with China, Argentina and The Netherlands while the biggest trade deficits was recorded with Germany, South Korea and Russia.
FISCAL BALANCE
While the Brazilian GDP hit 1.61 trillion dollars in 2021 and the government balance ended in a deficit of 4.42% in relation to GDP (-17.41 billion dollars) while the expectations this year is that the fiscal spending will land around a deficit of 5.82%. But a lot can change and the Lula government needs a lot of money to live up to their promises. President Bolsonaro raised the Auxilia Brasil payments to 600 BRL per family but didn’t add it to the budget for 2023. In order to cover all his pledges President Lula will need an additional 200 billion BRL next year. In order to expand the government budget by what is needed President Lula may have to ask congress to exceed his constitutional boundaries and break the main fiscal rule in Brazil that limits growth of public expenditures to the previous year’s inflation rate. Lula planned to unveil a multibillion Dollar spending plan on Monday the 7th of October but later delayed the unveiling. It is still to be seen how the new government will go about the public spending.
“NBC’s view on the Brazilian economy at this moment is that although several main indicators like unemployment and production look promising or solid and inflation seems to have been curbed, a potential World recession with falling commodity prices could hit Brazil’s economy hard and President Lula’s government could find both Senate and Congress opposing initiatives to raise public spending, which could make it difficult for Lula to deliver on the campaign promises. The early signs from the Lula camp are to keep interest rates at its current high level which could hamper investments as credit for especially small and mid-sized companies becomes scarce and expensive. On a positive note foreign investors have reacted positively to Lula’s stated focus on the environment which could well mean increased instream of FDI’s.”
Lauritz Stræde Hansen - Partner, Nordic Brazilian Capital
Sources: Macrotrends, Valor International, Bloomberg, World Bank, BBC, POV International, CEIC, Banco Central do Brasil
