There is just over a month to go until the four-year presidency of Luis Inacio Lula da Silva begins and uncertainty continues regarding the guidelines of the new government’s economic policy. Will he be the Lula of realpolitik in the first term or will the heterodox currents that led Brazil adrift during Dilma Rouseff’s two mandates (2010-2016) prevail? The most quoted name to take over the reins of the economy today is that of Fernando Haddad, but Lula has made it clear that he wants to be the main decision-maker in the economic area and that he has clear ideas about the line to take: “I know what is best for the people and I know what is best for the market,” he recently declared.

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Negotiations are underway to approve the PEC da Transição, a Proposal for a Constitutional Amendment presented by the incoming government of Lula, which aims to authorize expenditure in 2023 outside the budget “expenditure ceiling” for an amount of R$ 203 billion (about 42 billion dollars). The PEC withdraws four types of expenditure from the 2023 budget: financing of Auxilio Brasil (which will again be called Bolsa Familia) for 175 billion, new investments for 23 billion, federal university expenses (5 billion) and donations for the environment (0 .1 billion).

Given that the opposition holds a majority in both houses of Parliament and that a qualified majority is required to approve the PEC, the negotiations involve ministerial positions, appointments in state bodies and companies and the maintenance of the “orçamento secreto”, i.e. the budget available to each parliamentarian without having to answer transparently.

Haddad, although not yet formally appointed Minister by Fazenda, spoke for the government to communicate that the priority of the Lula government in 2023 will be the approval of the tax reform. The reform proposal is based on the structure designed by the economist Bernard Appy, director of the Centro de Cidadania Fiscal and which provides for the introduction of a tax on consumption and services (IBS), on the model of VAT. A tax reform is essential to relieve companies of obligations that are not only financially burdensome but also bureaucratically Kafkaesque (according to a study by the World Bank, companies in Brazil spend around 1,500 hours a year just calculating the taxes to be paid).

In October 2022, industrial production grew by 0.3% compared to the previous month. A modest reversal after two months of decline, but on an annual basis the industry is down 1.4%.

On November 20, 2022, Ilan Goldfajn was appointed president of Banco Intermericano de Desenvolvimento (BID).

He is the first Brazilian to occupy this prestigious position. Goldfajn assumes office effective December 19 and will remain in office for 5 years.

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In the quarter ended at the end of October 2022, unemployment fell to 8.3% (against 8.7% in the quarter ended in September), confirming its downward trajectory. It is the lowest index since 2014 and corresponds to about 9 million unemployed. Another good news concerns the increase in the real average monthly income of workers, which stands at R$ 2,754.00, up 4.7% compared to a year ago.

According to some economists, the trend is for the unemployment rate to stabilize at around 8%, given that significant GDP growth is not forecast for 2023.

Direct investments in the country (IDP), the more lasting (non-speculative) investments intended, for example, for the construction of new factories or the expansion of existing production capacity, are growing. In October 2022 they amounted to US$ 5.541 billion, compared to US$ 3.375 billion in October 2021.

Here is the trend of the main economic indicators. From this month we also insert the forecasts for 2023.

GDP (Value added at market prices)

 2017201820192020202120222023     20212022
GDP – real growth (%)1,3%1,8%1,4%-4,1%4,50%3,05%0,75%     4,5%2,76%

The 2022 GDP forecast continues to grow: +3.05% against +2.76% a month ago.

Internal factors (stimulus to consumption, complete reopening of commercial activities, increase in tourism, etc.) are compounded by the recovery in demand for commodities and their prices, also thanks to the process of reopening the Chinese economy.

A slowdown in GDP is expected for 2023, which forecasts give to a modest +0.75%.

Inflation and real/dollar exchange 

IPCA (IBGE – %)2,95%3,69%4,20%4,38%10,0%5,92%5,08%

The year-end inflation estimate rose slightly, to 5.92% compared to +5.61% a month ago.

The forecast for the end of 2023 is for inflation still well above the goal set by the Central Bank, at +5.08%.

Exchange rate R$/US$ (end of the period)3,253,754,015,195,575,255,25

The dollar is quoted today (December 6, 2022) at R$ 5.28, up from a month ago (R$ 5.12). Uncertainty about the economic policy of the new Lula government and increasingly advanced negotiations to authorize R$ 203 billion in spending outside the “expenditure ceiling” in 2023 are causing fears about a possible loss of fiscal control for Brazil .

It is possible that, once the economic and fiscal policy has been defined by the new government, tensions will decrease and there will be a gradual revaluation of the real.

For the end of 2022, the estimate of the dollar rate remains stable at R$ 5.25 and the same assessment is made for the exchange rate at the end of 2023.

The euro is quoted today at R$ 5.54, up sharply from a month ago (R$ 5.06). At the same time that the real depreciated against the dollar, the euro appreciated strongly against the US currency. The result was a maxi-devaluation of the real against the euro (almost 10% in one month).

Interest rate

Nominal Interest rate (end of the períod)7,00%6,50%4,50%2,00%9,25%13,75%11,75%
Real interest (deflactor: IPCA)4,05%2,81%0,30%-2,38%-0,75%7,83%6,67%

The prediction of the economists consulted by the Banco Central is that there will be no changes in the discount rate (SELIC) at the next meeting of the Banco Central, which should therefore remain at +13.75%.

A reduction in the SELIC is expected for the end of 2023, but still at high levels. Inflation still does not give enough respite to allow for more substantial cuts.

For this reason, the real interest rate (discounted inflation) is expected to remain at record levels next year as well.

The Brazilian stock exchange (Bovespa)

A month of high volatility and losses for Brazilian equity assets, which did not follow the performance of the US stock exchanges.

Ibovespa closed the session of 5 December 2022 at 109,401 points, -6.4% compared to the close at the beginning of November (116,929 points on 1 November 2022). The decline in the period was -9% in dollars and -12% in euros.

Fears of an abandonment of the spending ceiling and a populist economic policy by the new Lula government provoked a reaction from the financial markets. A growing fiscal imbalance could lead to a burst of inflation and a sharp devaluation of the Brazilian currency, with the consequent need to raise interest rates and cause a sharp recession. It is in this scenario that the new Lula government will have to demonstrate its ability to reconcile fiscal responsibility with social responsibility. Lula succeeded in his first two terms and hopefully he can also succeed in the third.