Good indicators result from luck, “blessed” inheritance and government

Appreciation of the real, a drop in the unemployment rate, downward revisions to inflation expectations and upward revisions to GDP growth: 2023 has been a year of good indicators for the Brazilian economy so far.

But, although members of the government and allies of Luiz Inácio Lula da Silva (PT) celebrate, the numbers cannot be exclusively attributed to the government’s economic policy, according to economists.

Part of the scenario is the result of measures taken in previous administrations, such as those of Michel Temer (MDB) and Jair Bolsonaro (PL), but also by initiatives of the National Congress and the monetary policy of the Central Bank.

Other important factors include results from the productive sector, especially agribusiness, and a favorable international context that has been reflected in the Brazilian economy, which some analysts have defined as “lucky” for the current government.

“Luck”: the international context favors the start of the Lula government

The drop in commodity prices, for example, has helped to reduce food and fuel inflation, says Gabriel Leal de Barros, partner and chief economist at Ryo Asset.

To give you an idea, a bag of soybeans, which reached close to BRL 180 in January, is now quoted at BRL 135 (-25%), after reaching BRL 126 in June, according to data from the Center for Advanced Studies in Applied Economics (Cepea), of the Luiz de Queiroz School of Agriculture (Esalq) at the University of São Paulo (USP).

The barrel of Brent oil, used as a reference in international operations, fell below US$ 80 this year, after surpassing US$ 130 in 2022, according to the US Department of Energy.

“The fall in commodity prices is so great that it is contaminating wholesale inflation indicators”, explains Barros. “IGP-M and IGP-DI are falling to the point of deflation. And part of that is going to retail, raising awareness, for example, of food and fuel inflation in the IPCA”.

In fact, the official indicator of inflation in the country recorded a deflation of -0.08% in June, driven mainly by the -0.66% drop in the food group, -0.42% in household items, and -0.41% in transport, which includes fuel.

“We are having a positive surprise not because the government is delivering a better agenda, but because it was lucky”, says the economist. “This tailwind is external, not domestic. There is no domestic justification for this to have happened,” he says.

Sérgio Vale, chief economist at MB Associados, explains that 2023 is a year of adjustment after three economic crises that have occurred over the last few years. “First came the Covid-19 crisis, followed by a very large demand shock due to fiscal policy. Then, the war in Ukraine, responsible for pushing energy prices up there”, he points out.

“There were three very deep crises, and 2023 is a year of adjustment in which world inflation indicators are slowing down due to high interest rates in much of the world.

Internally, an important part of the good news in the economic field over the past seven months is linked to the result of agribusiness, both in terms of economic activity and inflation. The 1.9% increase in the Brazilian Gross Domestic Product (GDP) in the first quarter of 2023 was strongly influenced by the 21.6% growth in the sector, a record since the fourth quarter of 1996.

According to the Brazilian Institute of Geography and Statistics (IBGE), the result, released in June, is explained mainly by the increase in soybean production, the main grain crop in the country, which concentrates 70% of the crop in the first quarter and should close this year with a record.

“A good part of the story has to do with agriculture, and there is nothing to do with either the previous government or the current one, because it has to do with the scenario of high commodity prices in recent years, leaving producers well capitalized and investing, in addition to climate issues, which resulted in this very expressive production”, says Alessandra Ribeiro, economist and partner at Tendências Consultoria.

Temer and Bolsonaro governments contributed to the rating upgrade

In June, when the international risk rating agency S&P Global Ratings changed the outlook for Brazil’s credit rating from stable to positive, supporters of the Lula government celebrated the news, attributing it to the performance of the current economic policy. As it is the first positive change in the country’s rating since 2019, the comparison with the Bolsonaro government was immediate.

For Alessandra, however, the change results from measures adopted in a broader horizon. “It’s a bit of the body of work in recent years, especially from 2016 to now”, she summarizes.

“There is a ‘blessed legacy’ of reforms, many of them, in fact, led by Congress”, says Sérgio Vale, from MB Associados. “These were macro and microeconomic reforms, which began in the [governo] fear,” he says.

As important factors that have occurred since then and which have contributed to a more optimistic outlook for the Brazilian economy, economists cite the labor reform and the change in the long-term interest rate of the National Bank for Economic and Social Development (BNDES), carried out during the government of Michel Temer (MDB).

From the Bolsonaro government, the social security reform and the approval of important regulatory frameworks, such as sanitation and railways, stand out. Inflation control can also be largely attributed to the independent action of the Central Bank (BC), whose formal autonomy was approved in 2021.

“It’s what allows the BC to operate in a technical and independent manner, whether it’s government A, B or C, it guarantees predictability and really concrete effects for price stability, which is one of the body’s missions”, explains Alessandra.

Fiscal framework, inflation target and tax reform helped

At the beginning of Lula’s third term, the proposal for a new fiscal framework and tax reform, already approved in the Chamber, and the decision to maintain the inflation target for the coming years at 3% and to establish, from 2026, a continuous target, in line with what is practiced in other countries.

“The market was very afraid of what could come out of the fiscal framework. There is still a procedure ahead, but the fact is that the text, although not ideal, came with important points, mainly the brake on the growth of expenses, of 2.5%, and the limit for increasing expenses limited to 70% of revenue growth.

According to her, this helped to reduce risk perception. “If we take financial assets, future interest fell well, the exchange rate appreciated. This has to do with the new government”, she explains.

For Vale, the fact that the PT government was unable to undo any of the important reforms of the past, despite attempts, also contributes to a more optimistic perspective of the macroeconomic scenario.

“In this sense, you have a government that throughout the first half learned a lesson that ended up having positive repercussions”, he assesses. “If we manage to carry out the tax reform, there will be an additional leap in this direction”.