Though the ongoing mass protests in Brazil are a cause of worry for investors, many are more concerned about the Lula government’s socialist economic policies, which they fear could worsen the fiscal spending situation and already-high inflation.
Brazil has been seeing mass protests against President Luiz Inacio Lula da Silva ever since he assumed power in October, with many rejecting his narrow win against the previous conservative president, Jair Bolsonaro, from the Liberal Party. However, it is the current government’s fiscal and other economic policies that are on top of investors’ minds.
During his campaign, Lula, from the Worker’s Party, had pledged to raise spending for social assistance programs. This month, the country passed a constitutional amendment that will allow the Lula administration to circumvent a spending cap rule and hand out roughly $116 per month to families under a social welfare program.
“We would have to raise some taxes or find some money to pay for expenditures. We won’t have space or time to focus on the efficiency and structural problems of taxation in Brazil,” he said.
“Even the green agenda, which is one of the best opportunities we have, depends on the guidelines for fiscal solvency and debt-to-GDP trajectory.”
Inflation Worries
Though the inflation rate declined over the course of the past year in Brazil, it consistently remained above 5 percent for every month. According to a survey of economists by the country’s central bank earlier this month, inflation is expected to remain above 5 percent this year, rising to 5.31 percent.The central bank’s benchmark interest rate is currently set at 13.75 percent, which is a six-year high. Analysts predict the bank will be slow in reducing the rates, with an easing down only expected to begin in September.
The high interest rates are weighing down on economic growth by discouraging business investment and consumer consumption. Recovery in consumption is also likely to be slower. Low wages and the long-term trend of industrialization add to the woes.
Protests and Political Considerations
On Jan. 8, hundreds of supporters of Bolsonaro stormed the Supreme Court, Congress, and the presidential palace. Many of them refuse to accept the results of the October election in which Lula received only 50.9 percent of the votes compared to Bolsonaro’s 49.1 percent.Most protestors insist that Lula’s victory is illegitimate on multiple grounds, such as his corruption convictions related to his first two terms as president.
The armed forces of Brazil conducted an audit of the 2022 presidential election and concluded that it could not guarantee that fraud or irregularities did not take place.
Many protestors are also worried about the Lula administration imposing a communist regime. Several demonstrators that took part in the protests on Jan. 8 are part of a movement that is demanding the military to oust Lula.
Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said to Reuters that creditors will be closely watching how politics and social dynamics in Brazil will play out in the coming weeks.
“The violent demonstrations attest to the deep social and political polarization pre- and post-election … The unsettled and deeply divided political environment and related high social tension keeps risk premia high and could undermine overall governability.”
