The coup attempt of January 8, 2023 is now turning from a national drama to a global farce, with a plot worthy of a classic film about a “banana republic” coup. Amateurism and improvisation sent a few thousand Bolsonaro loyalists into jeopardy, without there being – fortunately – any chance of success. Now justice is running its course to identify those responsible at all levels, because the events that occurred, however embarrassing in their development and outcome, remain extremely serious and must be punished.

That said, the Lula government has completed its first month without any other particular jolts and also without having precisely outlined the guidelines for the next four years. To do this, one piece was still missing, the election of the presidents of the House and Senate of the newly elected national congress.

After months of great negotiations to define the balance between executive power and legislative power, the vote of the parliamentarians led to the re-election of the two current presidents: Arthur Lira in the Chamber of Deputies and Ricardo Pacheco in the Senate.

The re-election, which might seem a sign of continuity between the Bolsonaro and Lula governments, is instead the reaffirmation of the power of the parliamentary bloc called Centrão, made up mainly of the following parties; Progressistas, Republicanos, Solidariedade, PTB, PSD, DEM, MDB, PROS, PSC, Avante and União Brasil.

They are the same parties that supported the Bolsonaro government and who now support the Lula government. Without the parliamentary support of the Centrão, nowadays, Brazil cannot be governed. This is what is defined in Brazil as “physiologism”: there is no ideology, anyone in government is supported ecumenically in exchange for favours, seats and clientele.

At the meeting of the Monetary Policy Committee (COPOM), which ended on 1 February 2023, Banco Central decided to keep the discount rate (SELIC) unchanged at 13.75%. It is the third consecutive meeting in which the SELIC remains unchanged. From March 2021 to today, the discount rate has gone from 2% to 13.75%. In the note that accompanied the decision, Banco Central signaled that it will extend the maintenance of the SELIC until inflation shows new signs of abating.

The tax reform, considered a priority by the Government, will hardly be approved before six months, according to what was stated by Simone Tebet, Minister of Planning after her meeting with Arthur Lira. Therefore, there is a possibility that the 2024 Budget Definition Law (LDO) cannot be approved using the new tax model.

Inflation ended 2022 at 5.79% on an annual basis. Once again, therefore, above the target set by the Banco Central (3.5% with a tolerance range of 1.5% more or less), but almost half that of 2021 (10.01 %). The sectors that recorded the highest variation in prices were food (+11.64%) and health (+11.43%). It has been calculated that without government intervention, which cut taxes on petroleum products and energy, inflation in 2022 would have been 9.6%.

Treasury Minister Fernando Haddad announced the restoration of fuel taxes and the opening of taxpayer tax debt negotiation processes, as a way to bring the state’s primary deficit back to 1% of GDP. But methods and timing are to be defined.

The public debt of the Brazilian state in 2022 was 73.5% of GDP (about 7,224 trillion reais), a sharp decrease compared to 2021 (78.3%) and above all to 2020 (87.57%), the year of pandemic. Excellent news for the Brazilian debt rating, even if part of the expenses approved by the “PEC Kamikaze” (those of Auxilio Brasil, in particular) will weigh on the 2023 budget result.

Aloizio Mercadante has been appointed chairman of the BNDES, with subsequent approval by the board of directors of the state-owned investment bank. Mercadante is Lula’s right arm and historical name of the PT.

Another important appointment: Jean Paulo Prates is the new president of Petrobras, appointed by President Lula to lead the Brazilian company with the largest capitalization. Prates has significant experience in the oil space, but the market fears that he could introduce changes in Petrobras’ pricing and dividend distribution policy.

In January, a financial scandal involving the Americanas distribution company exploded. According to what has been discovered so far, there seems to be an accounting “hole” of around 40 billion reais, created through illegal accounting maneuvers. The investigations are ongoing and involve both the management of Americanas and PwC, the company responsible for auditing the company’s accounts. The share of Americanas, listed on Bovespa, collapsed by 90% in a few hours and the crisis risks affecting the main creditor banks (Itaù, Bradesco, BTG, Santander and Safra). Americanas’ creative accounting problems may involve other companies controlled by the billionaire trio Lemann, Sicupira and Telles.

According to research by the National Confederation of Commerce (CNC), 77.9% of Brazilian families said they were in debt and 28.9% said they had debts that had already expired and were therefore in default. In 2018 the percentage was 60.3%: the economic crisis caused by the coronavirus pandemic and the increase in interest rates starting from 2021 are putting Brazilian families in difficulty.

Here is the trend of the main economic indicators:

GDP (Value added at market prices)

 2017201820192020202120222023      2022
GDP – real growth (%)1,3%1,8%1,4%-4,1%4,50%3,04%0,79%      2,76%

The average growth forecast of Brazilian GDP for 2023 remains stable at around +0.8%. The maintenance of high interest rates by the Central Bank is certainly a major brake on the economy, but inflation still above 5% still does not allow for an easing of monetary policy. However, if the Chinese economy were to start growing strongly again, as the IMF predicts, the commodities sector could certainly act as a locomotive for the Brazilian economy.

Inflation and real/dollar exchange 

IPCA (IBGE – %)2,95%3,69%4,20%4,38%10,0%5,62%5,78%

Inflation is back under control, but there are no signs of another major decline. However, if the government were to ensure a fiscal balance, inflation could fall further and allow for a less restrictive monetary policy and favor growth.

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

The dollar is quoted today (February 7, 2023) at R$ 5.17, a sharp decrease compared to a month ago (R$ 5.45). Given that the dollar is weakening globally, there is room for a further revaluation of the real, also because from the point of view of the trade balance and current transactions, the inflow of hard money remains substantial. Much depends on the government’s fiscal policy, from which concrete signs are expected of the maintenance of policies that respect the fiscal balance of the state.

The euro is quoted today at R$ 5.55, down from a month ago (R$ 5.76). We are still far from the prices at the beginning of October 2022 (around 5.10), but we must also remember that in this period the euro has also greatly appreciated against the US currency. The reference currency for Brazil is always the dollar, so a weak dollar also tends to weaken the real against the euro.

Interest rate

Nominal Interest rate (end of the períod)7,00%6,50%4,50%2,00%9,25%13,75%12,50%
Real interest (deflactor: IPCA)4,05%2,81%0,30%-2,38%-0,75%8,13%6,72%

The Banco Central, in its last meeting at the beginning of February, kept the discount rate (SELIC) at +13.75%.

The SELIC is expected to decline slightly by the end of 2023, but only by 1.25%. Fiscal uncertainty and inflation still above the target (3.5%) do not allow for more substantial cuts for the moment.

Therefore, the real interest rate (inflation discounted) is expected to remain at record levels again this year (just below 7%).

The Brazilian stock exchange (Bovespa)

A positive month for Brazilian equity assets, which followed the growth trend of the main world stock exchanges.

Ibovespa closed the session of 6 February 2023 at 108,721 points, +4.4% compared to the close at the beginning of January (104,166 points on 3 January 2023). The growth in the period was +10% in dollars and +8% in euros.

Signs of a softening of the FED’s monetary policy and the reopenings in China have caused euphoria on the markets, also infecting the Brazilian one. However, some criticisms by Lula of the Banco Central and the questioning of its autonomy alarmed operators and dampened enthusiasm. The markets can respond to Lula’s statements/threats in only one way: protecting themselves by selling Brazilian securities and buying assets in hard currency.