Lula, a winning return
The return to the country of Lula da Silva, already President from 2003 to 2011, raised doubts. He can claim a positive balance sheet since taking office on January 1 last year. Remarkably, he did not begin his new mandate under the best auspices. He took office in a deleterious climate. Not accepting defeat, supporters of the previous president wanted to paralyse the country. The tension was the sweet torpor of the Brazilian economy.
High tension between Lula and Central Bank
Since his government coalition does not have a parliamentary majority, there are fears that political institutions will be blocked. But ultimately, the results of Lula’s first year as president are largely positive.
At the economic level, at 2.9%, GDP growth in 2023 exceeded expectations, and the unemployment rate reached its lowest level since the beginning of 2015. Inflation returned to the Central Bank’s target for the first time since 2020. The trade balance showed a record surplus. After fleeing the country in 2022, foreign investors returned in 2023.
Politically, President Lula defeated his parliamentary minority to adopt essential reforms for the country.
Major tax reform
This was Lula’s most significant victory last year. The one no one expected.
After 30 years of discussions, a critical tax reform was adopted on 15 December. This reform will simplify the country’s highly complex tax system. Specifically, double taxation and federal and local taxes will replace five consumption taxes.
The new law will end the ‘tax wars’ waged by the various authorities of the country, which often find themselves before the courts due to the great displeasure of the companies dragged into these disputes. This will reduce the administrative burden and improve the international competitiveness of Brazilian products.
According to the World Bank, a company can take over 1,500 hours to prepare its tax return in Brazil, more than six times the global average. This additional cost is passed on to the consumer, slowing the country’s potential growth. However, with gradual implementation by 2034, this reform will take time to bear fruit. Nevertheless, it has already had a significant positive effect.
The President reassured investors about Brazil’s ability to reform, which contributed to the stability of financial markets.
Financial improvement
After the adoption of the new tax law, S&P raised the rating of Brazilian debt. At the end of this reform, the country’s external accounts improved, thanks to the increase in the trade surplus, and the Central Bank's action explained the improvement in Brazil’s rating.
Monetary policy has been particularly judicious with a pre-emptive rise in interest rates that has quickly stemmed the price drift and now allows monetary easing. While the US Federal Reserve is still discussing when it should start easing policy, the Brazilian policy rate has already been cut six times since the first move in August 2023.
Monetary easing, a sharp fall in inflation and an improvement in the perception of sovereign risk allow the Brazilian State to finance itself on better terms. This strengthens the country’s financial strength and investor confidence. The value of real has been appreciated in the foreign exchange market. And the return of foreign investors pushed Brazilian equities to record levels in December. However, these favourable developments in the financial markets must not make us forget the weaknesses of the Brazilian economy.
Economic weaknesses
Several structural brakes have long penalised the Brazilian economy. Insufficient infrastructure, low savings and investment, significant population inequalities, low worker productivity, and high public debt limit the country’s economic development.
In recent years, economic development has become increasingly unbalanced. Half of last year’s growth comes from agribusiness and the extractive sector. Conversely, the share of industry, which provides high-value-added jobs, is declining.
Foreign trade is also increasingly focused on a few products and partners. In 2023, agricultural products accounted for half of exports. More than 30% of Brazilian sales abroad went to China. Regarding imports, Russia has become unavoidable with its cheap refined petroleum products.
The structural gaps and great dependence on some products and some countries limit Brazil's economic potential and make it more fragile to external financial shocks. That’s why we don’t invest in the Brazilian stock market. Don’t buy Brazilian stocks.