Foreign investors fear the return of state capitalism under Lula’s government

The interventionist initiatives of the government of Luiz Inácio Lula da Silva (PT) have contributed to turning on the yellow light among foreign investors in relation to the country. According to data from B3, the Brazilian Stock Exchange, January was marked by a strong outflow of foreign capital, totaling R$7.9 billion – which partially reversed the good performance of the capital market in the last months of last year.

The sudden exit was mainly due to external factors, such as the prospect of maintaining high interest rates in the United States. But the noise of internal politics and signs of greater state interference in the economy weighed on the perception of risks and also affected the attraction of investments, according to international consultancy analysts interviewed by People’s Gazette.

The main factor of distrust was President Lula’s repeated attempts to interfere in the mining company Vale, aiming to place former Finance Minister Guido Mantega in the presidency of the company, which had international repercussions.

A report by the British newspaper “Financial Times” cited investors’ fears of a resumption of “state capitalism” in Brazil. The text narrates President Lula’s commitment to rescuing the leading role of the Brazilian State in the economy, and brings an image of the Abreu e Lima refinery, in Pernambuco. Known for cases of overpricing and corruption in previous PT administrations, which earned it the nickname “the most expensive refinery in the world”, the unit is being expanded – which was celebrated with Lula’s revanchist speech at an event last month.

Ptara Sílvio Campos Neto, senior consultant and partner at Tendências, the dirigiste attacks have been a negative counterpoint to the international situation – which works in Brazil’s favor and makes the country a relatively safe haven compared to other emerging countries.

“There is an ambiguous perception among investors. On the one hand, Brazil has favorable aspects, with solid external accounts and monetary policy under control, which make us better than countries like Russia, Turkey, Peru and Argentina”, explains Campos Neto . “But the internal scenario raises the alarm when we see the government’s difficulty in dealing with private companies, which want to do their business and define their direction. Vale’s example highlights this”, he says.

Alexandre Reitz, head of variable income at the Brazilian branch of Swiss bank Julius Baer, ​​adds the government’s attempt to modify the governance of Eletrobras, privatized in 2022.

“The Palácio do Planalto does not seem to agree with the privatization process conducted by the previous government, although it was a legal procedure widely debated and constructed with the National Congress. The same scenario has been repeated with Vale. This type of intervention, although not is decisive for long-term investors, does not contribute in the short term and adds noise for investors”, says Reitz.

The international consultancy GlobalData TS Lombard assessed, in a report released in January entitled “Lula’s new industrial policy is a red flag”, that the president “contributes to economic uncertainty by interfering in companies listed on the stock exchange”.

Lula government on the radar

According to analysts, the behavior of the Lula government was always on the radar of external investors. The beginning of the administration was troubled, above all, by the president’s clumsy speeches criticizing the conduct of monetary policy by the Central Bank and the demonstration of lack of rigor in public spending.

The fiscal framework has provided some tranquility to the market, but there are still several uncertainties regarding the achievement of this year’s target, which may be revised. On Thursday (8), the president once again questioned the need for the adjustment. “If you can achieve zero deficit, great. If you can’t, great too,” declared Lula, in an interview with Itatiaia radio.

The recent launch of the new protectionist industrial policy and measures already adopted in the past, with forecasts of a BNDES investment package of R$250 billion for the sector, also corroborates analysts’ concerns.

“The use of BNDES to boost the industrial sector in Brazil has already been tried, and the long-term results were not positive. Any idea along these lines is frowned upon by the market. In the end, the burden of subsidies always falls on the national Treasury. Furthermore, the market allocates capital more efficiently than some State agents, choosing which sectors deserve more resources”, assesses Reitz.

Alex Agostini, chief economist at Austin Rating, explains that international capital is short-sighted and “doesn’t pay to see” signs of bad weather, always paying attention to the macroeconomic structural scenario. “For now, investors are holding their breath. The perception is one of caution. It’s not yet possible to turn the tables. But the government’s setback is worrying,” he says.

External scenario benefits Brazil

Economists remember that the country is benefiting from the recent loss of momentum in the Chinese economy. The less than optimistic forecasts for the Asian giant have driven away investors, who have turned to emerging markets. Furthermore, the American interest rate cut should happen at some point, which also tends to contribute to the pace of capital flow into the country. Brazil has only lost to Mexico in foreign investment in Latin America.

“Foreign investors are still more optimistic than domestic investors”, assesses Campos Neto. “But the trend could move towards a convergence of expectations if the macroeconomic picture deteriorates.”

The assessment is that at some point the tax issue may take its toll. Noises such as the impasse with the repayment of the payroll, the allegation by the Federal Court of Auditors (TCU) that revenues from the 2024 Budget are overestimated and the disclosure of the R$230.5 billion gap in 2023 were poorly received by the market .

“At the domestic level, a more stable political environment would be a crucial initiative to attract investment to the country. The government should turn its attention to controlling expenses instead of prioritizing exclusively the increase in revenue as a means of achieving fiscal balance”, believes the Julius Baer analyst.

For Alan Riddell, Deal Advisory & Strategy partner at KPMG Brasil, the country’s challenge is to create a favorable environment for attracting financial investments and, above all, direct productive investments. “To achieve this, the government needs to allow the private sector to take the lead, without the prospect of being tutored”, he states.

Due to internal disruptions, Riddell believes, the country is losing opportunities to attract large players to operate in strategic sectors, such as technology, energy and fuels.

“We don’t have structured public policies and the risk/return ratio is very high. We would attract more capital with an environment of fiscal stability, tax simplicity, good regulation and legal stability, with respect for processed and judged decisions. There is no shortage of world is capital to be invested in profitable projects”, he says.