Brazil’s economic landscape is anticipated to experience a cooling trend in the coming year, marking a shift from the robust growth witnessed in 2023. The dynamics are becoming more complex as the government engages in a delicate balance with lawmakers over the allocation of resources to meet ambitious budget goals, setting the stage for a potential tug of war.
In 2023, Brazil’s Gross Domestic Product (GDP) surpassed expectations, buoyed by improved investor confidence in Finance Minister Fernando Haddad’s efforts to address deep-seated imbalances. However, the current outlook presents a more mixed picture, with analysts highlighting the fiscal aspect as the country’s “weakest link” among macroeconomic fundamentals, according to a report from Rabobank. There are concerns of an escalation in market risks if the government acknowledges a grimmer budget reality.
Projections indicate a notable deceleration in the growth of Latin America’s largest economy, with expectations pointing to a 1.6% growth rate in 2024 compared to the 3.0% seen in the previous year. The survey, which polled 50 economists from January 8-18, offered estimates for this year ranging between 0.4% and 2.5%.
On a positive note, public spending initiatives, such as settling accumulated federal debt and implementing smaller cuts in the federal investment scheme known as “PAC,” could potentially provide a boost to the economy. Analysts note positive surprises from recently approved fiscal measures, but concerns loom over the overall fiscal trajectory. Federal expenditures for President Luiz Inacio Lula da Silva’s social plans are outpacing federal revenues, despite tax initiatives from Finance Minister Haddad.
Between January and November of 2023, the primary deficit reached 114.6 billion reais ($23 billion), reversing a surplus of 49.7 billion reais during the same period a year earlier. The fiscal scenario faces additional challenges as lawmakers overturned a presidential veto, approving a bill that granted fiscal waivers totaling around 27 billion reais to companies and municipalities.
In response, the government unveiled tax adjustments aimed at limiting benefits across various sectors, subject to congressional approval beyond a four-month executive order. Discussions are underway about potentially re-imposing taxes on imports, raising concerns among retailers and consumers.
Despite these challenges, financial markets have shown relative calm, with the local currency maintaining stability around 5.0 per U.S. dollar. The real is expected to remain near this level for at least a month, especially with economic activity winding down for Carnival in February.
The government’s ability to achieve its goal of reducing the primary deficit to zero is increasingly in doubt. Median estimates from eight banks compiled by Reuters suggest a reduction to -0.8% of GDP from -2.2% in 2023. The government’s challenges lie in obtaining revenue amid real growth in mandatory spending.
Looking ahead, the first bimonthly report on revenue and expenditures due in March will play a crucial role in determining the extent of the necessary budget adjustments to meet the zero deficit target. The outcome could either necessitate a substantial budget freeze or spark discussions about potential changes to the target, impacting fiscal credibility.
In the broader regional context, Mexico’s economy is expected to grow by 2.2% this year, while Argentina’s GDP is projected to contract by 2.3%. The economic trajectories of these countries add to the overall narrative of economic complexities and challenges faced by nations in the Latin American region.
