Can Brazil become the “Switzerland of Latin America”?

In recent days, positive reports about the Brazilian economy have been piling up. In the country itself, the government and Congress are arguing about the course to be set in economic policy.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

There is currently a change of mood in the Brazilian economy: At the beginning of June, the IBGE statistics office reported growth figures for the first quarter that were almost twice as high as most investment banks had expected.

The Brazilian economy grew by 4 percent compared to the same period last year. Agriculture in particular contributed to this boost, with an increase of almost 19 percent in twelve months. Stagnant Brazil thus suddenly found itself among the world’s four fastest-growing economies, according to a survey by Austin Rating.

Investment banks such as Goldman Sachs now expect Brazil to grow by 2.6 percent in 2023 instead of 1.9 percent. Other investment banks are also rushing to revise their forecasts for Brazil upward.

For the first time in years, the investment bank Verde Asset Management sees potential for value increases in Brazilian stocks and bonds. Verde’s otherwise skeptical analysts expect the real to strengthen and the high key interest rates (currently: 13.75 percent) to fall soon because inflation is also losing steam (3.94 percent in twelve months). With the package of budget rules just before Congress, the leftist Lula government has minimized the risk that it will increase spending disproportionately, analysts say.

Robin Brooks, President of the Institute of International Finance (IIF), also sees good prospects for Brazil. Thanks to its impressive trade surplus and the external stability it has achieved, Brazil is well on the way to becoming the “Switzerland of Latin America. A huge trade surplus is emerging that no other country in the region has”, he said. “This will give Brazil external stability and a strong currency,” the former Goldman Sachs strategist said on Twitter. Brooks also believes Brazil could become the “anchor of the region” as a country that will play a fundamental role in Latin America’s economic and financial stability.

The good mood on the financial markets contrasts with the low level of enthusiasm with which entrepreneurs view Lula’s government. From a business perspective, the president’s main ambition seems to be to roll back the positive economic reforms implemented by his right-wing populist predecessor Jair Bolsonaro.

He attacks the central bank for its high interest rates and would just as soon put it back under state control as the recently privatized energy company Eletrobras or the water industry. The government has already significantly increased its political influence over the oil company Petrobras and the national development bank BNDES.

But Lula’s bid to turn back the clock on state economic policy is being thwarted by the conservative Congress. This raises hopes for the reform agenda. The planned tax reform will be decisive for Brazil’s further economic development. The government and Congress intend to submit a first draft in the next few weeks.

Economists are unanimous in their opinion that tax reform for Brazil’s industry would be one of the best measures to significantly increase productivity in the short term. The prospects are good that Brazil could now take a step forward in this regard.

São Paulo
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