Lessons learned? What to expect from Lula's new government

Investors and analysts are paying close attention to the initial signs being given by Brazil's president-elect, Luiz Inácio Lula da Silva, about the composition of his new government, as they begin to form opinions about the policies the new government is likely to follow. 

Lula recently named his Workers' Party (PT) colleagues Fernando Haddad and Aloizio Mercadante to finance minister and president of state-run development bank BNDES, respectively.

These nominations have frustrated investors who would have preferred these two economic positions to be filled by economists with more centrist backgrounds, especially given that Lula's campaign was backed by a broad spectrum of politicians.

Mário Braga, senior analyst for Brazil at Control Risks, speaks with BNamericas about the signs of what's to come for Brazil's incoming government, which takes office on January 1.

BNamericas: What is your opinion of the first names that have been announced by president-elect Lula in the economic area, including finance minister Fernando Haddad and the new BNDES president, Aloizio Mercadante?

Braga: The elections were based on a coalition campaign and our view has always been that once ex-president Lula is elected, we would see competition between more traditional names historically linked to the PT [Workers' Party] and others linked to more centrist parties, more pragmatists, who supported Lula's campaign.

These nominations that you mention, of Haddad and Mercadante, allow us to draw two conclusions. The first is that Lula will likely continue concentrating power and autonomy in the economic area. Haddad's views are aligned with Lula's, that the state should play the role of stimulating the economy and social programs should be a priority.

Mercadante's nomination means a step further along this pathway. Among the names speculated to take over BNDES, Mercadante was the one most closely connected to the history of the PT. He’s the one that has the most developmentalist ideas in the economic area and it’s because of this that the reaction in the capital markets has been negative.

BNamericas: Given these first appointments, what scenario can we expect for the first year of Lula's administration?

Braga: My feeling is that the first year of Lula’s government will be a mix of Lula's first term (2003-2006) and his second term (2007-2010). In other words, we will have a policy focused on a few core issues, which would be better income distribution, increasing the minimum wage, stronger opposition to deforestation and policies linked to [mitigating] climate change.

BNamericas: Do you see any risk of BNDES returning to a model of subsidized loans?

Braga: We see the Lula administration avoiding some models that didn’t work in the administration of Dilma Rousseff [president between 2011 and mid-2016].

The so-called national champions policies, the subsidy policies likely won’t be replicated. 

[Editor’s note: The national champions policy was a strategy used by previous BNDES administrations to focus on financing Brazil's large companies, helping them to become multinationals].

There is fear now because of Mercadante's appointment, but it seems to me that some lessons have been learned. What we’re likely to see will be BNDES more focused on loans to small companies and other state-owned banks, Banco do Brasil and Caixa Econômica Federal, more focused on financing low-income families.

BNamericas: Could the appointment of people linked to the PT to the most important positions in the ministry of economy create conflict in the government's support base, with the other political parties?

Braga: We’re still going through a period of adjustment of the political forces. Lula will increase the number of ministries to create more room for the parties supporting the coalition, but the PT will probably retain the most important posts.

That said, the risk of conflict in the support base next year is still low, but these risks will start to increase after the 2024 municipal elections, because that will be the time when the political forces will start looking at the next presidential election in 2026.

BNamericas: The lower house of congress recently approved a change in the law on state-owned companies, reopening spaces for political appointments in these firms. What do you think about that?

Braga: What we've been waiting for since Lula's election is for state-owned companies to become instruments of public policy. For example, at [state-run oil firm] Petrobras we expect a change in the fuel price policy, a change in the company's investment program and a reduction in the distribution of dividends to shareholders. Just as we also expect changes in the State banks, which I’ve already mentioned.

With regard to this change in the law on state-owned companies, this impacts the integrity and governance of these companies. This law was created in the wake of the Lava Jato anticorruption probe and is a robust instrument to avoid political interference in State companies.

Now, with this change in the law, these practices (political appointments to positions in companies) can again be adopted on a larger scale. This change in the legislation was approved very quickly and had broad support in the lower chamber, which shows that congress is interested in this type of model as well.

BNamericas: How do you see popular support for the elected government now? Do you think there’s any chance of social unrest and dispute of election result prior to Lula's inauguration on January 1?

Braga: Not only in the election in Brazil, but in several other countries, we have seen that elections are decided by rejection and this makes the honeymoon period of new governments increasingly shorter.

The election in Brazil was also based on high rejection rates. Any candidate who was elected in Brazil had a weaker electoral base, with less robust popular support.

But we have seen that the scenario of institutional risk has been reduced, since the result of the election was widely recognized by the national political establishment and also by the entire international community. This reduced the room for challenges.

On the other hand, we have seen that there is growing radicalism of the forces opposing the elected candidate. It's a small but highly radicalized portion of the electorate and, yes, on inauguration day there could be protests, and over the coming months we might see triggers that could lead to more protests.

BNamericas: What are the economic reforms most likely to be carried out in 2023?

Braga: I believe that there is already a focus on advancing the tax reform.

This reform has been debated for some time and could be approved in 2023 or in the first few months of 2024.

Other than that, I rule out changes in terms of labor reform. I think that if there is any change in labor reform, it will tend to be limited to guaranteeing more labor rights for app workers, which was an issue that Lula mentioned a few times during the campaign.

BNamericas: What do you expect for the business environment in 2023?

Braga: In 2023 we will have a change in points of tension and we will likely see lower levels of tension in general.

In 2022, the biggest risks that were on the radar were related to the electoral process and doubts about a peaceful handover of power in the country. 

Next year, Lula's more pragmatic stance will reduce that noise.

On the other hand, concerns about 2023 will likely be focused on the country's fiscal performance, what the public spending model will be like and what the financial viability of government spending will be. In a context where I think that the more radical voices of the PT won’t have as much strength, my base scenario is one of moderate fiscal policies.

The government-elect will understand that it needs to create a good business environment because it needs private investors to invest in infrastructure, sanitation, energy projects. 

Once the entire government team is assembled and announced, which will give us definitions about the economic model, I believe there will be an improvement in the business environment.