Lula's spending plans unnerve Brazilian investors
Fears grow that Brazil will fail to eliminate its deficit.
Published June 28 2024
Brazilian markets have endured a sell-off this year as investors fret over the spending plans of President Luiz Inácio Lula da Silva’s government.
The country’s benchmark Bovespa Index has fallen 7% year-to-date, while Brazil’s 10-year government bond yield has risen 18% since the start of the year. Meanwhile, the Brazilian real has slipped about 12% against the US dollar this year making it the third-worst performing emerging market currency after the Turkish lira and the Argentine peso.
President Lula returned to power in January last year on pledges to boost welfare spending and expand the state. His time in office has seen the rapid expansion of various mandatory expenditures and, combined with his government’s reluctance to cut spending in other areas, fears have been growing that it may fail to eliminate the primary deficit this year as planned.
Brazil has a history of running budget deficits, which have had negative knock-on effects on growth and inflation. The country’s public debt as a percentage of gross domestic product (GDP) rose to 76% in April.
Despite the sell-off in the real, Jason DeVito, portfolio manager for emerging market debt at Federated Hermes, says some Brazilian assets have remained surprisingly resilient. “Corporates in Brazil are providing a huge opportunity given the resilience of the economy and healthy export markets,” he says.
“President Lula is pushing for more spending, but legislation will likely limit his generosity. I imagine he will also be met with heavy pushback from the business community based on concerns around the investment climate as debt rises,” he adds. As a result, DeVito remains optimistic on Brazil and expects President Lula will be flexible and pragmatic in the face of numerous challenges.
On Thursday, Brazil's central bank raised its GDP growth forecast for 2024 to 2.3%—up 1.9% predicted in March—on the back of stronger-than-expected economic activity, which has also pushed up inflation projections for this year to 4% against an official target of 3%.