Flashpoints Forum Spot Brief
Lula’s Return—Brazil’s Outlook After 2022 7 November 2022
Ergo is working closely with numerous frontline experts, including former senior Brazilian cabinet officials, Brazilian business magnates, former US Ambassadors to Brazil, military and intelligence community officials, Brazilian political experts, and many others. We are sharing this special brief to provide Forum members with our most current thinking on the outcome and implications of Brazil’s presidential election.
KEY TAKEAWAYS
Despite the white-knuckle lead-up and nail-biting finish of Brazil’s 2022 election, former president Lula Inácio Lula da Silva is poised to assume office on time and without turmoil. Punctual recognition of Lula’s victory by allies of Bolsonaro and Brazil alike—the Biden administration congratulated Lula within minutes of the conclusion of voting—denied Bolsonaro an opening to contest the results of an election whose legitimacy he had previously attacked.
• In keeping with Ergo’s September forecast, which assigned low probabilities to high-risk contingencies (namely a coup or organized violence), fears that the election would bring Brazilian democracy to its knees have receded.
• While Bolsonaro’s concession was both brief and belated—a perfunctory, two-minute address which tip-toed around his defeat broke 45 hours of post-election silence—his chief of staff has taken care to confirm that a peaceful transfer of power is underway.
• Roadblocks set up by disgruntled Bolsonaro supporters are unlikely to stand between Lula and the presidential office, whose current occupant has given an audience to the Vice President-Elect and entreated his followers to avoid “restricting free movement.”
Though his opponents have tarred him as a Venezuela-style socialist, Lula is likely to govern with a light and pragmatic hand. As he labors to reconcile his redistributive instincts with Brazil’s material constraints, the following factors will curtail his economic ambitions:
1. Moribund economy: In the years since 2008—the peak of a commodities sugar-rush that underwrote Lula’s social spending—Brazil’s economy has flatlined as a result of a commodities bust, domestic mismanagement, and the ill-timed shock of COVID-19.
2. Spending Cap: Even if Brazil’s economy surprises to the upside, Lula will bump up against a fiscal ceiling (introduced in 2016 by constitutional amendment) which prevents the government from spending more than the previous year’s outlay, indexed to inflation.
3. Central Bank independence: Though some Brazilian institutions sustained damage during Bolsonaro’s presidency, its stoutly independent Central Bank will remain a bastion of sound monetary policy and a corrective to any outbreak of rash fiscal policy.
4. Coalitional constraints: To parlay his minority party (PT) into a majority coalition that can pass laws, Lula will need to court centrist parties—such as the PSD and PMDB—which will insist on fiscal discipline.
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SLIGHT LEFT TURN
While Lula’s economic program is likely to be tame towards business and tamed by circumstance, an index of his first two terms and campaign manifesto suggests that his government will slant left on privatization, trade, and social spending.
• Despite assurances that he will not undo the privatization of the state electricity provider, Lula has resisted Bolsonaro’s push to hive off the state’s largest public bank and oil firm. Proposals to privatize SOEs will receive an unsympathetic hearing in Lula’s government.
Brazil is still a good place to make money. A lot of international companies are investing in Brazil, and I expect that to continue. – Brazilian business magnate
• His support for a Mercosur (a South American trade bloc) notwithstanding, Lula is a protectionist by instinct. Brazil’s tariff and non-tariff barriers are likely to remain steep in his third term.
• As an eleventh-hour electoral maneuver, Bolsonaro instituted a temporary increase in payments from the government’s flagship cash-transfer program (from BRL 405 to BRL 600 per month) which Lula has vowed to make permanent.
» The constitutional waiver this budget-straining proposal will require—to bypass the fiscal cap—may be passed with the help of Lula’s political savvy and Brazil’s low threshold for constitutional change.
In the coming months, Lula’s choice of coalition partners, cabinet picks, and management of state-owned companies will bring the economic direction of his administration, as well as its appetite for labor market reform and changes to tax policy, into sharper focus.
REHABILITATING BRAZIL’S INTERNATIONAL PROFILE
After studiously cultivating Brazil’s image in his first two terms—most notably with Bolsa Familia, which became a touchstone for aid programs to the poor, and the BRICS group, heralded as an emblem of a multipolar world—Lula will work to restock Brazil’s reputational capital in his third term. Though the BRICS group never lived up to its fanfare and the dewy glow of Brazil’s young democracy has come off, Lula is likely to build and benefit from global goodwill.
• Lula’s pledge to end deforestation of the Amazon will help restore Brazil’s credit with the international community, which recoiled from Bolsonaro’s support of loggers and miners, and may make it a more attractive destination for foreign investment.
• After two years of testy US-Brazil relations, the Biden administration is likely to forge close ties with the
incoming and left-leaning Brazilian government.
We will continue to monitor developments in Brazil and throughout the region and provide updates and conduct convenings as needed.
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Now that the clouds over the results of the elections have dissipated, the mood appears to be changing. There are some funds that have already lifted some environmental restrictions on Brazilian bonds.
– Brazil’s former Secretary of Foreign Trade
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