The Brazilian economy will remain weak amid doubts about Lula’s spending drive

BUENOS AIRES/MEXICO CITY (Reuters) – Brazil’s slowing economy is likely to remain weak in 2023 as newly elected President Luiz Inacio Lula da Silva’s planned spending campaign risks keeping already high borrowing costs high for longer, according to a Reuters poll. from economists.

Lula’s government, which took power on Jan. 1, is ramping up social welfare programs beyond strict budget limits to tackle deep-seated social problems. The government of former President Jair Bolsonaro did not abide by these rules either.

However, many investors and analysts fear that a new wave of planned spending could put Brazil’s debt on an even more unsustainable path and cause lower inflation, which is falling after a long series of interest rate hikes.

In response to their concerns, the central bank is set to keep benchmark interest rates high for an extended period, but this could amplify the economic slowdown and fuel tensions with the government.

Growth is expected to ease sharply to 0.8% in 2023 from 3.0% last year, according to the median estimate of 44 economists polled between Jan. 9 and Jan. 20. Growth forecasts for this year are unchanged from the October poll. With an upgrade of 2022. from 2.7%.

“The main reason for our negative outlook has to do with the fiscal policy that is being implemented,” said Thomas Goulart, economist at Novus Capital. His growth forecast for this year was just 0.5%.

With fuel taxes likely to be reintroduced to help pay for additional spending measures, he added, “inflation will be around 5.0% in 2023 and the central bank will not be able to lower the interest rate, which will reduce growth in the coming years.”

This month, bank president Roberto Campos Neto cited the prospect of a fuel tax refund as one of the key factors behind his forecast for inflation of 5.0% in 2023 – an outcome that would exceed the 4.75% target for a third year.

Finance Minister Fernando Haddad presented a fiscal plan to allay market fears. However, he said it was only a list of proposals that Lula had yet to agree to and were subject to “disappointments”, as well as more unforeseen expenses.

The next tax reform

Domestic markets, which have been quiet recently, could be tested after the Southern Hemisphere summer and Carnival holidays, as the government begins to pressure lawmakers to vote on tax reform in the first half.

“There are risks of higher inflation as (consumer prices) pass a lower exchange rate in the event of a more severe financial downturn,” said Mauricio Nakahodo, chief economist at MUFG.

In response to a separate question about the general direction of Brazil’s GDP growth in 2023, a slight majority of seven out of 12 respondents said it was bearish, while three saw a potential upward trend and two said they were neutral.

The headwinds hitting Latin America’s first economy should be offset to some extent by an improvement in terms of trade from higher commodity prices due to China’s reopening, and the impact of Lula’s policies on aggregate demand.

Estimates of growth in Brazil in 2023 ranged between stagnation to 1.5%, while expectations for Mexico varied between 0.5% contraction and 1.7% growth, as the average in the survey indicates a slowdown to 1.0% this year from 3.0% in 2022.

Regarding the Mexican economy, Citi analysts said in a report that they expect activity to slow “as US economic expansion loses momentum, labor market improvement slows, (and) real interest rates rise.”

But unlike Brazil, where rifts between the central bank and government materialize, Mexican President Andres Manuel Lopez Obrador has praised policymakers for their work, supporting business confidence.

Also, the Mexican peso traded near three-year highs against the US dollar, reflecting a calmer political climate compared to the chaos that has gripped the streets of Brasilia this month.

(For other stories from the Reuters World Economic Survey:)

Additional reporting by Gabriel Borin in Buenos Aires and Valentin Hillier in Mexico City; survey conducted by Momal Rathore, Chalu Shrivastava and Vijayalakshmi Srinivasan in Bengaluru; Editing by Ross Finley and Thomas Janowski

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