Inside Brazil’s Deepening Economic Struggles

People walk at Saara market in downtown Rio de Janeiro, Brazil, on Dec. 8, 2020. The country's poverty rate is at 27 percent. Mauro Pimentel/AFP via Getty Images

Analysis

Last year, Brazil’s economy struggled with rising inflation, a deflated currency, and a loss of investor confidence that analysts say may get worse in 2025.

Ongoing concerns over the nation’s rising debt have eroded investment due to President Luiz Inacio Lula da Silva’s aversion to cutting government spending, according to a Rane analysis.

Consequently, Brazil suffered a “sharp depreciation” of financial assets in the end of 2024.

At the same time, the U.S. dollar rose 7.2 percent against the real from Nov. 26 to Dec. 30.

The country’s main stock index, Ibovespa, also dropped 7.4 percent over the same period.

Together with the steep devaluation of the real, local reports labeled Brazil’s stock market and currency among the world’s worst performers last year.

The fretting over Brazil’s pubic debt trajectory is shared by other finance experts.

In a January report, the French banking group Crédit Agricole noted that despite Brazil’s sustained economic growth, the debt reduction trend witnessed in 2021–2022 has been reversed.

The group observed the “new fiscal anchor appears to be ineffective” and already has a tarnished reputation.

Brazilians say that combined with a stronger U.S. dollar and ongoing inflation, local residents and businesses are feeling the pinch of a diminished real in their wallets.

“Not only the poorest Brazilians but all Brazilians are affected when their purchasing power is reduced. In other words, everyone became poorer,” local economist and portfolio manager, Max Cohen, told The Epoch Times.

Challenges like inflation, poverty, and currency fluctuations aren’t new problems in Brazil. However, Cohen said they’ve gotten worse since the current president, commonly known as Lula, returned to power in 2023.

“The poor became even poorer. There is no doubt that this will be reflected in the next elections,” he said, adding that the current administration is “lying to the people” who elected Lula at a time when Brazil’s poverty was already a steep challenge.

Between 2021 and 2022, Brazil witnessed a reduction in poverty across the spectrum, according to World Bank data.

Brazilian officials reported a 40 percent drop in the country’s “extreme poverty” in 2023, but locals say higher prices and reduced purchasing power fuel a daily struggle for many.

A supporter of Brazilian presidential hopeful Luiz Inacio Lula da Silva hangs a flag with a photo of the candidate on her street stall during the presidential run-off election, in Rio de Janeiro, Brazil, on Oct. 30, 2022. Mauro Pimentel/AFP via Getty Images

“The average Brazilian faces a rising cost of living driven by persistent inflation and the depreciation of the real, which has made essential goods such as food, energy, and transportation more expensive,” Brazilian tax attorney Paulo Ricardo Alecrim told The Epoch Times.

Alecrim said unemployment and a deflated currency have heightened the sense of economic insecurity, making it harder for families to plan and save.

“The depreciation of the Brazilian real has driven up the prices of imported goods while widespread inflation has eroded purchasing power,” he said.

Alecrim added, “Many Brazilians are struggling to cover basic expenses, such as food and housing. The rise in delinquency rates and the decline in consumption reflect the worsening economic conditions, directly impacting quality of life and confidence in the future.”

Brazil’s high tax burden only complicates this, according to Alecrim. He said the law regulating tax reform on consumption was approved by the Brazilian Congress in December 2024 and awaits presidential approval.

“The fact is that, since the beginning of the current government, several measures have been implemented with the aim of increasing the tax burden, negatively impacting various economic sectors,” he explained.

Alecrim said notable examples include Brazil’s law on offshore taxation and subsidy taxation. He added there are other initiatives already implemented or planned to expand government revenue.

Reforms approved last year include a value-added tax (VAT) of up to 27.5 percent, putting Brazil on the list of countries with the highest consumption tax rates in the world.

The levy drew mixed reviews and concern from economists like Shireen Mahdi, who predicted the outcome of a high VAT could reduce purchasing power for locals.

Taxes aside, Cohen said inflation is the primary concern for locals. Official numbers paint a clear picture of how higher prices are impacting Brazilians.

In a January report, the National Consumer Price Index stated the biggest price spikes in 2024 were observed in the Food and Beverages group, with an accumulated increase of 7.69 percent. Gasoline had the most significant individual impact, with an accumulated inflation rate of 9.71 percent.

After inflation, Cohen said credit is second on the list of concerns for residents. “These are two elements that were controlled by the success of the Real Plan and today we are seeing all this gain go down the drain.”

The Real Plan—or Plano Real—was launched in 1993. Brazil’s Central Bank hailed the initiative as a “groundbreaking achievement,” which curbed the country’s hyperinflation that had been a constant since the 1980s.

This reversal happened remarkably fast. Hyperinflation dropped from 4,992 percent in June 1994 to 916 percent in December that same year, according to the Central Bank.

Government Spending

Much of the 2024 investor exodus from Brazil’s financial markets is rooted in concerns over Lula’s spending plans.

Among his promises to expand welfare subsidies, mandatory expenditures and a refusal to cut spending have fueled rising debt fears, according to an analysis from the investment banking group Federated Hermes.

However, despite the mass sell-off of the real in 2024, the group’s lead portfolio manager for emerging market debt, Jason DeVito, remains optimistic that Brazil’s congress will stem the flow of funds.

Brazilian President Luiz Inacio Lula da Silva and First Lady Rosangela Lula da Silva arrive at the  Planalto Palace in Brasilia on Jan. 14, 2025. Evaristo Sa/AFP via Getty Images

“President Lula is pushing for more spending, but legislation will likely limit his generosity. I imagine he will also be met with heavy pushback from the business community based on concerns around the investment climate as debt rises,” DeVito said.

The need to cut government spending to prevent further economic spiraling is widely echoed by many Brazilians, including Alecrim and Cohen.

“Our country needs to adopt strict fiscal discipline to lower the public deficit, creating a more favorable environment for attracting investments and promoting greater legal security for entrepreneurs. In short, the ideal is: less government and more freedom,” Alecrim said.

He also believes it’s imperative to reduce state intervention and expand guarantees for private enterprises in order for Brazil to regain investor confidence.

“There is no more powerful tool to combat poverty than empowering private enterprise, the true driver of a nation’s economic and social development,” Alecrim said.

Cohen agrees with this assessment. “Reduce government costs. The government spends badly and spends a lot. There is still a need to create an environment of trust to attract foreign investors.”

“The government communicates poorly because it does not want to tell the truth. And that drives investors away,” Cohen said.

He also thinks stark differences between Lula’s administration and U.S. President Donald Trump will further complicate the economic situation in Brazil.

Larry Ellison, Executive Charmain Oracle listens to U.S. President Donald Trump speak at the White House on Jan. 21, 2025, in Washington. Jim Watson/AFP via Getty Images

“The Lula government will have difficulties dealing with the United States in foreign policy and international trade. I believe that Brazil will lose in terms of trade with the USA simply because of opposing ideologies,” Cohen said.

This may take shape sooner than later since Brazil holds the rotating BRICS presidency in 2025. The BRICS alliance has historically fostered anti-West rhetoric and strong attitudes toward “de-dollarization.”

The trade bloc also contains U.S. political rivals like China, Russia, and Iran.

In November, Trump threatened 100 percent tariffs on BRICS nation members if they create a currency to compete with the U.S. dollar.

On his Truth Social profile, Trump stated, “The idea that the BRICS Countries are trying to move away from the Dollar while we stand by and watch is OVER.”

“We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100 percent Tariffs, and should expect to say goodbye to selling into the wonderful U.S. Economy,” Trump said in the post.