Improved economy encourages Lula to resist Centrão’s demands

The government is excited about the recent positive indicators in the economy, such as a slowdown in rising prices, an improvement in the perspective of growth in economic activity and encouraging signs from the external sphere and from risk rating agencies for the Brazilian debt. But this improvement in the scenario will not give President Luiz Inácio Lula da Silva (PT) enough ammunition to resist continuous pressure from the President of the Chamber of Deputies, Arthur Lira (PP-AL), for the sharing of large spaces of power to parties from within. and from outside the Planalto parliamentary base, less than 150 deputies.

Analysts and politicians heard by the People’s Gazette agree that the general picture of the economy showed signs of relief at the turn of the first to the second quarter, but discard that there are reasons for euphoria on the part of the government, which hopes to have good indicators to boost its plans in the elections of 2024 and, above all, 2026.

Since taking office, Lula has been betting on economic recovery as a way to maintain popularity and move forward with his political agenda. However, almost six months later, his difficulties in political articulation left him vulnerable to the attacks of the dominant Centrão.

With a mostly liberal profile in the economy, Congress resisted government projects aimed at increasing spending and greater state interference. Congressmen gave in within the limits of their physiology, with the release of a record amount of R$ 1.7 billion in amendments to the Budget in just one day, but they are still waiting for a broad ministerial reform to re-accommodate União Brasil, which is already part of the parliamentary support base, and also try to attract other centrist acronyms, such as PP and Republicans.

The expected restart of the government ended up being postponed, while PT members close to Lula insist on convincing the president of an imminent “economic turnaround”, driven by the approval of matters such as the fiscal framework and tax reform; by the new Growth Acceleration Program (PAC), which should be announced shortly; by BNDES financing; by trade agreements; by investments by Petrobras and, above all, by the easing of monetary policy.

The Monetary Policy Committee (Copom) of the Central Bank (BC) meets this Wednesday (21) to decide whether or not to reduce the basic interest rate (Selic), currently at 13.75% per year. The market is betting on maintaining this level, which the government publicly deems unacceptable. Charges even for the resignation of BC president Roberto Campos Neto will grow.

Reduction of uncertainties favors indicators, despite Lula

For economist Caio Vilela, from investment advisory Montebravo, the good harvest combined with growing external demand gave an unexpected boost to agribusiness, which has helped to positively revise forecasts for growth in the Brazilian Gross Domestic Product (GDP), previously at the 1% in 2023, now 2%.

But it also helped to reduce the insecurity generated by Lula’s electoral speech, which pointed to a re-edition of the second government of Dilma Rousseff (PT), thanks to the contention that the president had from Congress. “The BC’s firmness, the more centrist profile of Minister Fernando Haddad (Finance) and the end of the initial fear of fiscal anarchy removed uncertainties from the horizon”, she commented. Proof of this is in the trading sessions of the São Paulo stock exchange – in the first 20 days of June, the Ibovespa accumulated a rise of around 10%.

The expert agrees that inflation has given even more positive signs, such as the expectation of even deflation in June. But he does not believe that the Central Bank will be able to reach the center of the target for the year, preventing the basic interest rate from falling below two digits so soon.

This is due, he explains, to the set of stimuli to the economy still due to the pandemic. “As for agricultural production, there is still an environment of caution due to the general increase in costs and Chinese demand whose reaction was below expectations after the removal of restrictions to contain Covid,” he said.

Although Lula seems to be convinced that it is possible to promote miracles in the economy even while governing on the left, with limited actions to the center-right and concessions in parliament to the right, significant advances are ruled out.

The president had expected to close a free trade agreement with the European Union, a region that is facing a historic increase in food prices, but this was postponed until the end of the year. In addition, the billions of Chinese investments announced during his trip to the second largest economy in the world also did not materialize.

Fiscal tightening, inflation still outside target and Congress with a large conservative majority make up a challenging scenario. When voting on government proposals, a dividing line was formed to protect reforms approved in the Michel Temer and Jair Bolsonaro governments, when it comes to the economy. But it is precisely this resistance that has ensured the government to flee from astonishing scenarios, which would be confirmed with lack of fiscal control, increased distrust of creditors and acceleration of inflation.

According to the political risk report by the Government Relations and Public Relations agency BCW Brasil, the government is still going through a delicate moment of governance.

“The month of May demanded skill beyond the expectations of the mandate. Important guidelines, such as the fiscal framework and tax reform, are pending deliberation and the approval of the Esplanada Provisional Measure made it clear that the model imagined by Lula will need to be rethought”, underlined the document.

In summary, the sudden alliance between the Legislative and Executive proved sufficient to approve the Esplanada MP, but future agendas depend on the president’s political capital and the availability of the federal budget.

For Gustavo Bernard, a senior analyst at the consulting firm Distrito, the music that the economy plays is pleasant, but the government still doesn’t follow it. He hopes that the tendency is for the economic team to convince the government of the need for greater harmony between different expectations to accelerate positive processes.

“The signals from China are still not at the expected pace, but inflation and domestic growth may continue to surprise on the upside. Everything is a matter of eliminating the rest of the noise and mistrust that may still hang in the air”, she summarized.

Parliamentarians are incredulous with the ability of the GDP to take off

Senator Oriovisto Guimarães (Podemos-PR) stated that Lula has not yet announced plans for Brazil to grow, but only “delay proposals”, towards an “economic disaster”. As an example, he cites dribbles in the State-Owned Companies Law to give command positions to politicians, decrees to empty the Sanitation Framework, an attempt to relax the Fiscal Responsibility Law, return to union dues, creation of ministerial councils to oversee regulatory agencies and use from the National Bank for Economic Development (BNDES) to help Argentina.

“The Lula government continues to live in a parallel world. You want to lower interest rates, but you don’t do your homework to contain expenses. He wants to increase the GDP, but only thinks about creating more taxes and bureaucracy, making life difficult for those who undertake. Not to mention the enormous legal uncertainty when issuing illegal decrees, such as the Sanitation Framework. Then, if the result does not come, he will shamefully place the blame on some scarecrow, as is his practice”, said deputy Gilson Marques (Novo-SC).

The parliamentarians add that, despite having ended the first quarter with positive results, the employment index loses almost all of the quarter’s gains and remains oscillating at a low level, indicating that the year will be challenging due to the global economic slowdown, restrictive monetary policy and inflation.