Daily Management Review

Brazil's New Budget Plan Attempts To Win Over Hesitant Foreign Investors


Brazil's New Budget Plan Attempts To Win Over Hesitant Foreign Investors
Brazil's business and political leaders are urging European investors to invest in the Latin American oil producer in order to allay fears about leftist President Luiz Inacio Lula da Silva's extravagant spending plans.
Brazil was an emerging market investment darling last year, thanks to rebounding commodity prices and a hawkish, autonomous central bank. However, its economy, like that of other emerging market oil producers, has just crawled out of recession as a result of the COVID-19 outbreak. This year, the International Monetary Fund anticipates 0.9% GDP growth.
Investors and political leaders said the fiscal framework President Lula gave to congress last week allayed concerns that his ambitious social expenditure targets would cause the deficit to soar and increased Brazil's appeal to investors at the Lide Brazil investment conference in London on Friday.
"This is a positive mood," Joel Virgen Rojano director of Latin America strategy at TD Securities told Reuters. "There are clear anchors, clear rules."
In an effort to win over hesitant investors, Lula himself started a five-day visit in Lisbon on Monday. He promised to restore stability and promoted chances in the renewable energy and other industries.
In order to keep public debt manageable, his long-awaited fiscal framework would let expenses to increase by up to 70% of the increase in observed recurring revenues.
The summit was the Lide group's first international gathering in person since the outbreak, and Senate President Rodrigo Pacheco assured attendees that lawmakers would act quickly to pass the legislation, which also aims to stop a trend towards greater spending driven by speculative extraordinary gains.
"We will be very quick to approve the essence of the bill, even if we will have a few changes," Pacheco said, adding lawmakers needed to quickly pivot to tax reforms that are core to the government's revenue targets.
Since Lula's return to office on January 1, Brazil's markets have fluctuated amid concerns over the viability of lofty government revenue growth plans and interest rates at a six-year high.
This month, the real reached a 10-month high, while the first quarter saw an almost 4% return on hard currency bonds. Its first bond sale in nearly a year and a half, for $2.25 billion, was oversubscribed.
However, stocks are losing money in dollar terms in 2023 compared to modest increases in larger emerging countries and an increase in Mexican stock prices of more than 20%.
Following Lula's fiscal bill submission, stocks did increase.
The Wall Street bank JPMorgan announced this week that it is overweight on Brazilian stocks, citing expectations that an impending interest rate cut will boost the stock market.
Some deficit concerns will be alleviated by the new framework.
"Some of the tailrisks of something completely unorthodox were taken away," said Jared Lou, portfolio manager at William Blair Investment Management. "We didn't see very extreme policies being promoted. So that has led to some compression in credit spreads."
Brazil may benefit from the perception that U.S. interest rates are about to peak, which might weaken the dollar and support other currencies. This perception is stoking interest in emerging economies.
However, the situation is still unclear for many.
"It feels to me like there are a lot of things that can go wrong," said William Jackson, chief emerging markets economist with Capital Economics. "This fiscal rule only works if the government can raise revenues quite significantly."
Despite the unknowns, Ronaldo Patah, chief investment officer for Brazil at UBS Wealth Management, said that Lula's budget reform signalled he had moved his attention from undoing prior changes to looking towards the future.
"This is a better environment," he said. "Foreign investors have goodwill for Brazil - they want to invest."