Finance is optimistic about Lula 3. This opinion still barely appears in the main survey of voting intentions in the markets, which are the price of financial assets (interest, dollar, stock exchange, etc.). Nor would it be reasonable for him to appear: the election ended a week ago. But the goodwill, notable in the election year, continues.
That view comes across in conversation with half a dozen big-money managers and economists and bank executives. This cautious optimism is motivated by five restrictions or possibilities that can guide a Lula government 3.
To summarize, they are: 1) “walling”; 2) “fait accompli”; 3) external turn; 4) GDP potential; 5) juncture.
The “walling in” effect would come from the political conjuncture, from the election result in particular. Lula would be, in principle, a minority in Congress and would have a more precarious coalition, which will not be subject to more extreme petisms in the economy as well. More than agreements in Congress, Lula would have to make social alliances and with central cadres, in order to establish his government.
The “fait accompli” effect would make it difficult to reverse institutional changes, “reforms”, that made the economy less dysfunctional.
In addition to being difficult, it would be a waste of political capital to try to undo the labor reform, at least in terms of reducing labor costs. Likewise, it is not worth bothering with the entry of the private sector in sanitation, in the electricity sector, in oil and gas, railways, airports, etc. The progressive reduction of subsidized interest in public banks, among other factors, helped to expand the capital market. It would be better to leave all that alone, enjoy the gains and devote efforts to some other intervention.
The “external turn” derives from the belief in Lula’s ability to improve Brazil’s image abroad, with very objective effects on the economy as well. The government of the dark age (2018-22), of isolation, instability and environmental destruction, has alienated investors, not just those directly committed to the climate cause. That money must come back. There are people excited about the green and digital transition program announced by Lula in the campaign, which could multiply the effect of the “external turn”.
The “potential” effect concerns the revision of the growth outlook (increase in “potential GDP”). Reforms made from 2016 onwards would have increased the economy’s ability to grow without imbalances such as inflation and excessive external deficits.
The matter is “sub judice”, under debate, and the potential GDP would still be mediocre at most 2%. But there is some excitement about it.
Related to the “potential” effect, there is a more favorable domestic situation than imagined in 2021. The GDP of this 2022 is expected to grow 2.8%. Higher GDP, expensive commodities and inflation added to tax revenue. All this contained the relative size of public debt. High interest rates, a large trade balance and foreign investment contributed to the appreciation of the real this year and gave a more benign outlook for inflation, a rare situation in the world.
Yes, the interest rate will be horrible until the end of 2023. Without a solution to the fiscal problem (spending and debt), it could even increase, a harbinger of disaster. Without additional reforms, the growth potential does not increase.
But despite a decade of disrepair, the conditions for getting out of the mud have improved a bit; the social and political conjuncture may lead Lula to act “correctly”, from the point of view of finance.
This scenario is not unanimous, it has holes, is subject to thunderstorms and has a lot of wishful thinking. But for a change, let’s stay optimistic for today.