Brazil’s 2024 will be a confusing duality of impressive economic growth and lackluster performance in the market.
The gross domestic product (GDP), which is the country’s economic output, is forecast to grow by 3% this year for the third straight time. Unemployment is also at record-low levels, while the trade surplus is now at new highs.
The financial markets are telling a very different story despite these successes.
The iShares MSCI Brazil ETF is down 33% in the last year. Meanwhile, the Brazilian Real has been the world’s worst performing major currency.
The yield on five-year bonds has risen by nearly 15 percentage points.
Brazil’s fiscal expenditure fuels investor concerns
Concerns about Brazil’s fiscal problems, which have existed for a long time, is the main cause of investor unease.
The threat of excessive government spending is a real one. It can lead to inflation, and even higher debt repayments.
During his tenure, President Luiz inacio Lula da Silveira, also known as Lula has exceeded fiscal limits, giving priority to social expenditure over budgetary discipline.
The November budget, which was intended to restore investor confidence by preventing meaningful cuts in spending and instead depending on uncertain measures for revenue-boosting, failed.
In Barron’s Report, Ryan Berg says: “I am really confused about the next steps for the economic team.” Berg is the director of the Americas Program at the Center for Strategic and International Studies.
Brazil’s structural reform remains unattainable
Brazil has a serious fiscal problem. 95% of its federal budget is constitutionally required.
This is almost impossible to do, given that the legislature is divided into 30 different political parties.
Some analysts still see opportunities.
Arif Joshi is emerging market debt portfolio manger at Lazard Asset Management. He believes that bond markets are nearing the point when all the difference will be in the price.
Lula’s fiscal austerity could encourage investors to invest in government bonds that offer 15% returns and inflation of less than 5%.
One major worry has now been addressed: Brazil’s Central Bank remains independent.
Gabriel Galipolo – a Lula nominee who will assume the role as governor in the coming year – has shown a dedication to monetary vigilanteness by voting for the increase of the main interest rate since September to 12,25%.
Lula’s administration also suggested a reform of the tax system for 2025, to simplify and streamline the complex tax structure in Brazil. This could further reassure foreign investors.
The benefits of international trade
Brazil’s economy is buoyed up by the robustness of its trade relationships.
It exports to China three times as much as it does to the US. This protects them from any potential tariff threats if Donald Trump returns.
After 25 years of negotiation, the European Union signed a recent free-trade deal with Mercosur.
The deal, if ratified by the Brazilian government, could boost Brazilian exports.
Brazil’s economy is still struggling despite some promising indicators.
Reforms in the past, such as pension reforms under former president Jair Bolsonaro have barely scratched surface.
Berg, of CSIS, says that “maintaining a high level of growth is dependent on Lula pulling rabbits out a hat.”
The president’s biggest challenge will be to translate his resilience into real fiscal reform.
The post Brazil’s Economy Booms, but Stock Market Struggles to Keep Up may change as new information becomes available.
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