Lula da Silva assumed office for a third term as Brazilian president in January. Arguably, his previous time in office was a relative economic success: During his 2002–2010 tenure, GDP growth averaged 4%, the public-debt-to-GDP ratio fell, the fiscal deficit was kept within reasonable limits, and millions of people were lifted from poverty.
There will be some similarities to those heady years going forward. Lula will once again look to prioritize social spending; he hopes to relaunch his signature Bolsa Familia cash transfer program in the coming months. And he is likely to combine this aim with fiscal prudence in order to keep investors onside.
But the parallels with the 2000s will end there. For starters, Brazil’s impressive expansion during Lula’s first two terms was driven partly by a prolonged commodities supercycle; no such supercycle is expected in the coming years, with prices for Brazil’s key export commodities—such as oil, iron, soybeans and sugar—all seen declining over our forecast horizon following a bumper 2022.
Moreover, the public-debt-to-GDP ratio is around 15 percentage points higher than the average of 2002–2010, the budget shortfall is far larger, and sovereign credit ratings are weaker. As a result, the government has less fiscal room for maneuver, and markets will be watching carefully for signs that the new government is serious about fiscal responsibility. In this regard, a new set of fiscal rules due to be announced later this year will be key.
In addition, following years of economic malaise, a pandemic and Bolsonaro’s divisive premiership, sociopolitical tensions are higher than in past decades—as evidenced by supporters of the ex-president storming government offices in January. These tensions could translate into further street violence and legislative gridlock, and are likely to constrain investment.
The upshot is that Brazil’s economic growth is expected to be the second-weakest in Latin America this year—only ahead of Argentina’s. And growth over Lula’s four-year term is seen below the regional average, held back by large economic inefficiencies. As a result of this sluggish momentum and higher social spending, the Consensus among our analysts is for public debt to continue to rise remorselessly ahead. Brazil may have a new president, but its previous economic problems are not going away.
Insights from Our Analyst Network
On the policy outlook, the EIU said:
“Lula’s pragmatic stance so far has enabled fruitful talks with centrist parties, and a likely working legislative majority will allow the next government to make progress on part of its agenda, including obtaining legislative approval for new fiscal rules so as to accommodate higher expenses inherited from Mr Bolsonaro and Lula’s own proposals for increased social spending. Another priority for next year for the new finance minister, Fernando Haddad (a long-standing Lula ally), will be to pass a tax reform. […] If the new government does not commit to fiscal responsibility, which represents a serious risk to our forecast for a relatively moderate expansionary fiscal stance, the central bank will probably resume monetary tightening.”
On the near-term economic outlook, Goldman Sachs’ Alberto Ramos said:
“We expect real activity to remain soft throughout 1H2023 given a number of domestic and external headwinds to growth. […] Diminishing marginal returns from the economic reopening dynamics, tight domestic monetary and financial conditions, high levels of household indebtedness, low levels of economic slack (including a labor market with the unemployment rate at the NAIRU), moderating job creation, deteriorating consumer and business convenience, and the incipient turnaround in the credit cycle are expected to generate headwinds to services activity.”