The final quarter of 2022 saw a contraction in the Brazilian economy, with GDP down 0.2% compared to the previous quarter and only advancing by 1.9% year-on-year.
This is partially unexpected. During this period, the country wondered if outgoing President Jair Bolsonaro would accept the election results and prepare for the transition to Lula da Silva, a man with a very different profile than his predecessor and whose economic ideas still need to be clarified. This has significantly reduced the visibility for the future of the Brazilian economy and weighed on investment, down 1.1% compared to the previous quarter.
Over the year as a whole, growth was 2.9%. The gradual reopening of the economy after a period marked by the pandemic has had a lot to do with this, as has the state’s support for households in preparation for the elections. But these two factors ran out of steam towards the end of the year, especially as the sharp rise in interest rates weighed on household demand, one of the drivers of growth, with a 4.3% increase in 2022.
The current year does not look much better
With the domestic market slowing and Western economies struggling, we expect growth of around 0.8% in 2023. So it’s unsurprising that investors are delaying before embarking on the first economy in the southern hemisphere.
Lula’s willingness to stop the privatisation process of some state-owned companies does not reassure them. The attempt to bend the central bank to its wishes, to offer cheaper credit to stimulate the economy.
We invest in Brazilian government bonds. The latter continues to offer exceptionally high-interest rates (13.4% for the ten years) while inflation hardly exceeds 5.8%, hence exciting levels of real return.
On the other hand, if we keep an eye on the Brazilian equity market and Lula’s economic policy, we believe that the visibility of this market is insufficient to justify an investment, at least in the immediate future.