Initial optimism with Lula has given way to caution, say foreign investors – 04/24/2023 – Market

An initial optimism of foreign investors with the beginning of the Luiz Inácio Lula da Silva (PT) government, amidst the end of uncertainties in the troubled presidential election last year, gave way to a certain caution with doubts about the capacity of the new government to take the carry out structural reforms, analysts say.

The report heard economists, financial market operators and analysts from multinationals with operations in Brazil who participated in events with authorities in Washington in April, during the spring meetings of the IMF (International Monetary Fund) and the World Bank —several of them asked not to having their names published because they did not have authorization from their companies for interviews.

In general, most praise the new fiscal framework proposed by the Minister of Finance, Fernando Haddad, to reduce the public debt. Almost all, on the other hand, claim that Lula’s public demands on the president of the Central Bank, Roberto Campos Neto, regarding interest rates and talks about changing the inflation target are hindering the investment environment.

Anya Prusa, senior director at Albright Stonegbridge Group (ASG), an American consultancy for foreign investors, is one of those who praises the framework. She makes the caveat, however, that the proposal “is very optimistic when it comes to the revenue collected, which will depend on a tax reform that may take time to pass in Congress, and that will make it difficult for the government to reach its fiscal targets in the short term.”

“Investors are worried. The longer it takes to approve the new framework and the proposal for a tax reform, the less confidence they have”, says she, who participated in one of the meetings that the president of the Central Bank, Roberto Campos Neto, held with foreigners during his visit to the American capital this month. According to Prusa, there are doubts about Lula’s support in Parliament to approve these proposals.

Investor income, however, is not a privilege of Brazil, and emerging countries lose investments amid risk aversion with uncertainties about the global scenario, such as tensions between China and the United States and the War in Ukraine shortly after the planet going through a pandemic, according to reports released this month by the IMF and World Bank.

“It is a global challenge, investment flows in developing countries have reversed and there is an outflow of money,” World Bank president David Malpass told the report last week. “It is urgent for Brazil to have good economic policies to accelerate growth, and this will allow for the spending the government wants to do with the social and environmental purposes of climate change.”

The agency’s director for Brazil, Johannes Zutt, who also praises Haddad’s framework, argues that Brazil should work to open up its economy more, still very closed, in his assessment, and review trade barriers.

The American bank JPMorgan conducted a questionnaire with 200 of 2,600 participants (online and in person) of three days of events with investors that the institution organized in Washington during the week of meetings of the IMF and the World Bank. In one of these events, the bank received the Secretary of Economic Policy of the Ministry of Finance, Guilherme Mello.

Mexico ranks first among emerging countries where investors are more inclined to invest, with 28.9%. Brazil appears in second, with 19.6%, but the country tends to be in a high position due to the bias of the participants, many of them Brazilians, according to the organizers.

On the other hand, Brazil is in one of the last positions when asking the question of where investors want to de-risk, ahead only of India. “Overall, there is still a more constructive outlook for Brazilian assets,” says Cassiana Fernandez, head of economic research for Latin America at JPMorgan. According to her, however, foreigners are still not seeing buying Brazilian assets, but there are intentions to do so. The bank’s March report called Mexico “the bright side of Latin America” ​​and said Brazil would be “among the first to see a recession.”