(Bloomberg) — In his first spell as Brazil’s president, Luiz Inacio Lula da Silva managed to keep both low-income voters and Wall Street investors happy. In his first year back in power, he’s pulled off the same rare trick.
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The $2 trillion economy expanded close to 3% in 2023 — triple what analysts were expecting in January when Lula returned to office. Inflation has slowed and polls show the president’s supporters, predominantly poorer Brazilians, feel that he’s delivering. Meanwhile the stock market jumped to an all-time record and the country’s credit rating was improved.
Now the question is if the set of economic ideas that made the Brazilian leader successful — which can be loosely defined as Lulanomics — can go through 2024, a year when slowing activity, looming fiscal constraints and a difficult mid-term election will pose a major test to his strategy.
The Lula of two decades ago rode a multi-year commodity boom that generated cash for his trademark poverty-fighting programs while undertaking big infrastructure projects and doling out cheap public loans — all without scaring investors who fret about budget blowouts or government interference with the central bank.
At the outset of his latest term, Brazil’s economy has outperformed in 2023 largely thanks to what’s been dubbed the “super-harvest” — the biggest-ever crops of corn, soybeans and sugar — which is likely a one-off. The rollover of post-pandemic stimulus offered another temporary lift.
“The factors of this positive surprise are not sustainable,” says Gabriel Barros, chief economist at Ryo Asset in Rio de Janeiro.
‘What Will Lula Do?’
Growth has already cooled and is expected to halve in 2024 as the boost from agriculture fades, foreshadowing some unwelcome choices. Lula’s government vows to expand social programs and at the same time to balance the budget (after interest payments on debt). The consensus in financial circles is that something will have to give.
Between 2003 and 2010, Lula’s governments are credited with lifting some 20 million Brazilians out of extreme poverty, making the president one of the world’s most popular leaders before falling from grace amid a corruption scandal that took him to jail. Now 77 and more focused on his legacy after a spectacular comeback, Lula’s up against greater headwinds, political as well as economic.
Lula only beat far-right incumbent Jair Bolsonaro by a hair’s breadth in 2022. Opposition supporters ransacked Congress days after his inauguration, contending the vote was stolen.
While last year’s better-than-expected growth was crucial to solidify Lula’s grasp on power, now even his economic team anticipates a slowdown. The first half of 2024 will be the most challenging period, when he may be compelled to open the floodgates of public spending to support a weak economy, according to a member of his economic team.
If Lula can make it until August without jeopardizing investor confidence in his government’s commitment to fiscal responsibility, the rest of the year will be easier to navigate as lower interest rates will support growth again, the official says, requesting anonymity to describe the thinking of the economic team.
“If he succeeds, Brazil could benefit from lower long-term interest rates, currency appreciation and an increase in production investment,” says Adriana Dupita, an economist with Bloomberg Economics.
The president, a former labor union leader, remains committed to using state power to juice the economy and help the poor. Last year he restarted the “Minha Casa, Minha Vida” housing plan – which translates as “My Home, My Life” — with some $2 billion in funding, rising to about $3 billion in 2024.
‘Won’t Stop’
Cities Minister Jader Barbalho Filho, who oversees the program, says it’s surpassed the goal of providing financing for 375,000 homes in 2023. “Our government won’t stop,” he says — quickly adding that it’s also committed to financial responsibility.
That balancing act may get harder. Hawkish budget-watchers recall what happened a decade ago, when Lula’s chosen successor Dilma Rousseff ramped up public works, and handed out cheap government loans to stave off a downturn. Instead Brazil ended up in deep recession and lost its investment-grade credit rating, while inflation soared.
Just before taking office last year, Lula secured congressional approval for $34 billion in temporary spending, mostly a rollover of Bolsonaro’s aid programs that had been due to expire. Early on, he pushed through measures focusing on the neediest Brazilians – lifting the minimum wage, expanding Bolsa Familia benefits for 21 million low-income families, and offering students the chance to renegotiate their college debts.
At the same time, his economic team led by Finance Minister Fernando Haddad embarked on an overhaul of fiscal rules that’s eased investor concerns.
Haddad’s fiscal agenda was welcomed by S&P Global Ratings and Fitch Ratings, both of which raised Brazil’s credit score in 2023. The firms cited a new fiscal framework and an overhaul of the country’s tax code as adding to a series of economic reforms implemented over the past few years.
Strong activity data, along with falling interest rates and a broad risk-on rally, pushed local stocks to a record late last year. Though momentum for equities has faded in 2024 amid changing bets on US rates and a China-driven selloff, Brazil’s currency, which saw wild swings for most of the past decade amid constant political turmoil, has seen volatility plunge to a 10-year low. The calm — a result of relative political stability and still-high interest rates — is paving the way for the real to become one of the main destinations for emerging-market investors.
‘Moving the Goal Posts’
Lula’s administration has committed to erasing Brazil’s primary budget deficit in 2024, and then posting surpluses. The country’s fiscal framework caps spending growth and creates triggers for autonomic cuts if the government shows signs of losing their grip on the purse-strings.
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All of this is reckoned to be necessary because Brazil’s national debt, at around 75% of GDP, is bigger than that of most emerging-market peers — and near levels that economists say can be a drag on growth.
Few analysts expect Brazil to actually achieve the zero-deficit target this year. What they’re looking at is how Lula’s government will respond to a miss.
Crunch time will likely come in March, when budget reviews should lead to mandatory spending cuts if the numbers aren’t on track. Tweaking the rules at that stage would spread doubt about Lula’s commitment to reining in spending, says Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc.
“It’s like moving the goal posts and then saying you scored a goal,” he says.
As well as alarming investors, a surge in public outlays risks rekindling inflation – just when Brazilians are enjoying some relief from the pandemic spike.
“Prices were absurd,” said Rosemere dos Santos, 51, a self-employed cook in Rio. With food so expensive, Santos says, clients stopped ordering catering or deliveries – leaving her living off a 600 reais ($122) monthly stipend from Bolsa Familia.
Now the cost of rice and other staples has come down, she says, and “people are not only holding events again, but I’m getting new clients.”
‘Under Pressure’
With municipal elections due in October, there’ll be additional pressure for higher spending. Plenty of lawmakers in Lula’s Workers’ Party are chafing at the restraints that Haddad has sought to impose.
Programs like Minha Casa, Minha Vida can be vote-winners. Leia Sant’ana, a 51-year-old sales auditor for a phone company in Sao Paulo, says she’s a political skeptic who only backed Lula in order to get rid of Bolsonaro. But she qualified for financing under his housing program, and purchased her first home. Now, she says of the president: “He’s the one who watches out for us the most.”
Fiscal worriers point to a ratchet effect: once under way, the programs tend to expand. Bolsa Familia initially cost about 0.5% of Brazil’s GDP, and now it’s close to 2%, researchers at the Getulio Vargas Foundation found.
Thomas Traumann, who served as Rousseff’s press secretary, says Lula’s actions early in his new term are an indication of “what buttons he’ll push” if the economy turns sour and he has to choose between pledges of social support and budget restraint.
“Under pressure,” Trauman says, “he will direct all his efforts to the poor people who elected him.”
–With assistance from Martha Beck, Beatriz Amat and Raphael Almeida Dos Santos.
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