Following the storming of Congressional and Presidential buildings in Brasilia over the weekend, Exante Data invited former Central Bank Director and independent consultant Tony Volpon for a client call to reflect on the political, policy and market implications of the event. The full contents of that call are available to clients of Exante Data; but below we offer a summary of the situation in Brazil, partly based on the call:

Poignantly, the main impact of the attempted occupation of Government offices at Brasilia is the strengthening of President Lula, at the expense of the most militant of former President Bolsanaro’s supporters.

This early recalibration of political forces is likely to express itself in an emboldened expansionary fiscal stance by the Government, but tempered President Lula’s imperative not to exacerbate the political rift. This is likely to happen by being mindful of increasing Government revenues, while avoiding President Dilma Rousseff’s policy mistakes, which set off previous investor concerns.

(I) President Lula emboldened by the opportunity to paint his most strident opponents in Congress, at the State and Federal levels (and to some extent in the military, policy and judicial powers) as violent extremists. The political weakening of the most militant of Bolsanaro’s supporters coincides with the strengthening of President Lula’s political capital over the next weeks and months. His government is likely to use this new found support to push ahead vigorously with the announced fiscal programs (most of which target social programs which are both likely beneficial for economic growth and poverty reduction, while its expenditure is hard to dismantle later).

(II) Government will struggle to find sufficient revenue sources to fund these expansionary fiscal plans, with several taxation plans (including reintroducing a tax on gasoline) deeply unpopular among former President Bolsanaro’s supporters. Efforts by the Government to nevertheless push ahead with its fiscal plans will undoubtedly run into allegations of playing favorites and revive earlier accusations of the “bribing” of influential groups and individuals. Mostly, the civil (and market) reaction to President Lula’s expansionary fiscal plans find their fervor in unease with renewed distributional outcomes and concerns around fiscal policy running amok — potentially forcing monetary policy intervention while possibly opening Brazilian debt up to questions around sustainability.

(III) Brazil’s Legislative Center becomes even more important to the Government as it will need to actively court its approval not merely to get legislation passed, but to assure civic society and markets that the Government is not overcome by its own political rhetoric or drawn to far-off policy horizons. Despite early speeches by President Lula suggesting he might forge ahead, his recent stance seems to reveal an understanding that his Government needs the accent by the powerful political Center in the legislative chambers. While President Lula’s advisers might come from left-leaning clusters in academia, policy and political life, they do not appear bent on beaching President Lula’s Government early in his tenure on hyper-partisan policies.

Conclusion: Political risks in Brazil have been dramatically shown to be elevated by the storming and attempted occupation of Government buildings in Brasilia. But judging from the likely policy and political dynamics within the Government, the implications on debt service and sustainability are contained as long as President Lula’s emboldened government takes Brazil’s legislative center along for a moderately expansionary fiscal ride.

For more on political risks in 2023, see our previous substack on the topic.

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