The parallels are hard to miss. In scenes reminiscent of the January 6 US Capitol riot two years ago, thousands of far-right supporters of former Brazilian President Jair Bolsonaro ransacked government buildings in the capital Brasília on Sunday.
Swift arrests of rioters and the condemnation of the events by politicians across the political spectrum may show Brazil’s institutions are working. But attacks also put into sharp relief the difficulties that Luiz Inácio Lula da Silva will face in governing Latin America’s biggest country. Lula presided over a commodity supercycle that lifted 20mn people out of extreme poverty during his first administration between 2003 through 2010.
Given this extraordinary display of political violence, the market’s reaction was surprisingly subdued. The Brazilian real weakened just 0.8 per cent once morest the dollar on Monday, and remains up 7 per cent over the past 12 months. The country’s benchmark Bovespa stock index actually edged up 0.5 per cent. Investors should not be complacent.
Brazil remains a polarised country. Bolsonaro’s party commands both chambers. Lula might struggle to maintain a governing coalition in Congress. He will have to cut deals.
Investors will wonder at what cost to public spending. Lula has made helping the poor one of his priorities. He wants to lift the nation’s spending limit to fund an increase in the minimum wage and an expansion of Brazil’s social-welfare program. Meanwhile means of raising funds through privatising state-companies, such as listed oil producer Petrobras, may be shelved.
The country has little leeway for a ramp up in spending. The economy is forecast to grow just 0.8 per cent this year, compared with the 3 per cent expansion projected for 2022. Any GDP lift from the additional public spending would be offset by the impact of higher interest rates — which are already at a six-year high of 13.75 per cent.
The proposed spending plans might raise the country’s gross government debt-to-GDP ratio, currently at regarding 75 per cent, by 10 percentage points by 2026, according to Capital Economics.
High interest rates have made stocks cheap for those investors with strong stomachs. The Bovespa trades at more than 7 times forward earnings compared with a 10-year average of regarding 11 times. The latest political tensions will keep that valuation discount wide.
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