Balanços equilibrados, sem partidarismos, devem ser conhecidos.
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Yesterday marked the Brazilian president's first one hundred days in office. What should feel like 100 days of relief over the reestablishment of normalcy following 4 years of turpitude under Jair Bolsonaro, feels more like 100 years of lassitude. Watching the eagerness with which commentators, analysts, and the Brazilian press have criticized the new administration even before Lula's inauguration has been exhausting. The word “polarization” no longer suffices to characterize the tribal mentality that has taken over the country. In short, online and offline policy discussions in Brazil are currently indistinguishable from interminable rounds of Twitter-bashing, a particular vision of hell itself.
What has the Lula administration accomplished in its first 100 days? Right off the bat, the administration had to address a massive insurgency of disaffected voters who, over the past 4 years, were engulfed by extremism, conspiracy theories, and fake news. The January 8 attacks were ultimately handled with swift and decisive actions, leaving no room for continued social turbulence as many had feared. Praise for the incoming government's handling of a situation that could have easily led to a major standoff between democratic forces and the military was short-lived. Not long after the attacks, widespread skepticism over Lula's ability to deliver sound economic policies were once again being voiced by a vast majority of media outlets, pundits, and public intellectuals. That such criticism began in earnest only days after Lula was elected president is testament to the uniqueness of Brazil's situation. Never before has a president started a term not only without a honeymoon period, but facing substantial hostility from financial markets, the press, and former policymakers alike.
Apart from preventing the “coup d’État” that many had feared, the Lula administration brought in capable people into key Ministries, such as the Ministry of Health, the Ministry of the Environment, the Ministry of Education, the Ministry of Human Rights. Under Bolsonaro's leadership, the country experienced a dramatic rise in deforestation and environmental degradation with the dismantling of institutions, an increase in human rights violations, some of which were given voice by the former president himself, and a terrible loss of human life with the dismal handling of the pandemic. During Lula's first 100 days in office, environmental institutions are on the way to being rebuilt, the country has partly restored its formerly world-renowned vaccination program, human rights violations of indigenous people have been exposed and are being addressed. Moreover, to combat hunger and poverty, both of which have risen sharply during Bolsonaro's government, the Lula administration has rehabilitated the Bolsa Família program, Brazil's flagship poverty reduction policy. None of these achievements have received deserved attention. Instead, public opinion has been unduly focused on Lula's frustrations with the current level of interest rates, as well as on the government's plans to replace the country's ill-conceived spending cap.
The Battle over Interest Rates
Brazilian nominal interest rates currently stand at 13.75 percent annually, with inflation hovering around 4.6 percent as of March. Although market analysts still expect 2023 inflation to increase somewhat this year — inflation expectations for 2023 are currently at about 6 percent — if nominal interest rates remain at their current levels, real interest rates will still be extremely high, at nearly 8 percent. There is no justifiable reason for the present situation. Unduly high nominal and real interest rates have been taking a toll on the private sector, with some major companies filing for bankruptcy and other legal protections. Moreover, private credit markets are increasingly stressed and the country is at risk of a major credit crunch, a scenario that would tip Brazil into recession. With unemployment at about 8 percent, the population can ill-afford further economic pain.
Hence, there are clear signs that the Brazilian Central Bank has overplayed its hand on monetary tightening and that a shift in stance is needed. President Lula has been quite vocal about the need to avoid a recession, including by lowering the country's interest rates, but his remarks have been met with rampant hostility. Market participants (and the press at large) have interpreted Lula's statements as an attack on central bank independence despite the absence of attempts to remove the current central bank governor or to increase the number of voting members on the monetary policy committee. That the inadequacy of current interest rate levels is not being questioned despite evidence to the contrary is testament to an arguably ideological contamination of monetary policy discussions. The current head of the central bank, Mr. Roberto Campos Neto, was named by Jair Bolsonaro, who received widespread support from market participants. Prior to joining the central bank, Mr. Campos Neto spent his career in financial markets, and was himself a publicly-known Bolsonaro supporter.
The Fiscal Framework
In March 2023, Brazil's Finance Minister presented a proposal to replace Brazil's flailing spending cap. Approved in 2016 as a constitutional amendment, the expenditure ceiling has systematically failed to deliver the promised control over spending growth. Designed without adequate escape clauses to account for shortfalls in economic activity and other macroeconomic shocks, the spending cap was raised six times during the past six years. The ensuing loss of credibility led to Lula's commitment to enact a new fiscal framework during the first few months of his administration.
The framework presented some weeks ago is still incomplete and apparently lacking proper mechanisms to ensure adherence as well as a reduction in the pro-cyclicality of fiscal policy. Since the government made a show of presenting a short powerpoint “document” in lieu of a proper White Paper, it is difficult to evaluate the merits and shortcomings of the new framework. For now, what is known is that spending would initially be limited to 70 percent of government revenues, with some embedded adjustments and triggers. Although most local commentators have been quick to criticize or praise the framework, it makes more sense to reserve judgement until a full-fledged document is presented. Meanwhile, it would have been important for the Finance Minister to be present at the IMF-World Bank Spring Meetings taking place in Washington, DC. However, he has joined president Lula in his current trip to China.
Where does Brazil go from here?
Brazil's overall macroeconomic situation is neither great, nor terrible. Surely there will be a fiscal deficit this year and the next unless the new framework is in place — the framework currently predicts the reestablishment of a primary surplus by 2024. Nonetheless, debt-to-GDP has come down somewhat, from nearly 80 percent to about 74 percent. Notably, Brazil's debt is denominated in its own currency, giving the country significantly wider room for maneuver than its Latin American counterparts, particularly Argentina.
Inflation is receding slowly, and although there is room to reduce interest rates, that still appears to be unlikely in view of the standoff between the government and the central bank. Recession risks are thus on the rise.
Lula's first 100 days have been productive despite the unprecedented political hostility that has mired the country. However, it is not clear that it can continue to withstand current levels of internal adversarial/ideologically-driven criticism. A self-fulfilling recession cannot be ruled out. Such a scenario would do great harm to Lula's political standing and capacity to govern, raising the stakes for the 2026 elections. If current hostility continues while the battle with the central bank remains unresolved, a far-right comeback in just over 3 years may be all but inevitable.
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