Lula’s economic team picks still don’t indicate a solid commitment to austerity
Firms should closely monitor the first few months of the Lula administration, which will likely set the tone for the upcoming four years. If Lula’s economic team doubles down on passing a tax reform and proposing a new fiscal anchor, it will be a positive sign that the new administration is looking to showcase fiscal commitment, helping improve investment appetite and limit the level of BRL depreciation throughout 2023. If, on the other hand, the economic team chooses to prioritize greater government interventionism and showcases little effort to secure a tax reform, firms should prepare for high levels of FX volatility and depreciation, along with muted investment confidence.
Overview
Brazil’s Rui Costa, the governor of Bahía named as President-elect Luiz Inácio Lula da Silva’s chief of staff, stated that Lula would have an enlarged team of 37 ministers, representing a 60% increase from the current 23 ministries under President Jair Bolsonaro. To date, Lula has only revealed six ministerial picks, including Costa and other key figures for finance, defense, justice, and foreign relations. Notably, the Ministry of Finance will be headed by Fernando Haddad, who vowed to present a fiscal plan that ensures the sustainability of public debt despite having no intention of cutting spending in 2023. Along with the latest ministerial announcements, changes to the political backdrop have also fueled financial market concerns. On December 14, Brazil’s Lower House approved a bill making it easier for politicians to be appointed to run state-owned companies. Previously, appointment figures of state companies couldn’t have been politically active in the last three years—the new legislation now shortens that period to three months.
Our View
The latest appointments to Brazil’s economic team are beginning to shed light on the incoming administration’s policy priorities. The choice of Fernando Haddad, a career politician, demonstrates that Lula perceives negotiations with Congress as more critical than the ability to formulate economic reforms. In addition, the significantly higher number of ministries, along with the shortened quarantine period for political appointments of state companies, showcases the need for a greater number of political appointments to solidify the support among center-right-leaning parties, and therefore increasing governability levels. Moreover, the choice of political figures such as Aloízio Mercadante to head Brazil’s state-owned Development Bank (BNDES) raises the risk of a more interventionist credit policy to propel the government’s industrial projects. Not all the latest appointments signal looser fiscal commitment: Haddad’s appointment of Bernard Appy, the congressman who designed one of the tax reform proposals transiting Congress as the special advisor to fiscal reform, signals a moderate level of commitment to tax reform, particularly as it pertains to overhauling federal consumption taxes. However, the latest choices still don’t indicate a solid commitment to austerity and provide little information on what the next government might propose to replace the spending cap, a critical signpost for monitoring fiscal consolidation efforts.
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