MercoPress. South Atlantic News Agency

Hard times ahead for Lula and Brazilian Real, the most devalued currency in 2024

Lula da Silva recovering from head injuries and surgery

US dollar expectations in the Brazilian market are beating forecasts having reached R$ 6.30 in December, (from 4.85 in January 2024) making the Brazilian Real one of the largest currencies of emerging countries, as the most devalued during 2024, despite the Central Bank pumping some US$ 17 billion to the market hoping to contain the slide.

Finally the commercial dollar settled at R$ 6.12, but the Central Bank Focus survey gives a surprising view of what it is expecting in the near future.

The fact is that Brazil’s Real lost 21% of its value in twelve months compared to 16% for the Mexican Peso, 16% for the Turkish pound, 15% for the Russian Rouble and 10% for the South Korean Won, plus 8% for the Canadian dollar and 7% for the Australian dollar. Pound sterling towards December managed to keep its exchange rate vis-a-vis US$.

The rhetoric and what president elect Donald Trump can effectively implement, including his announced tariffs policy, have global financial markets on the brink, but in the case of Brazil, the situation can be attributed to a growing fiscal and primary deficits, despite the fact that president Lula da Silva and his Finance minister Fernando Haddad, believe it is positive since the Brazilian economy is beating growth forecasts and unemployment is the lowest in twelve years. However inflation continues to mount and so does the country’s debt and interest payments.

Lula da Silva back from head surgery blasted market expectations, “nobody in this country or in the markets has a greater fiscal responsibility than me; I handed this country’s finances in a privileged situation, and I’m planning to do the same, and it’s not the market that should be worried about government spending. Because if I don’s control expenses, and if I spend more than what I have, who are going to pay, are the poor. The only wrong this in this country is the interest rates policy that is above 12%”.

In effect this month in their last 2024 meeting the Brazilian Central Bank monetary policy committee, Copom, decided to increase the rate to 12,25%, and anticipated a further rise early 2025 to combat inflation and monetary volatility. A unanimous decision including that of Gabriel Galipolo, Lula’s pick to head the central bank in 2025, who aligned with the orthodox board of directors, (loathed by Lula), openly criticized minister Haddad handling of the budget.

In other words more trouble ahead, financial and political. The central bank inflation estimate target for for 2024 and 25, was 3%, but ended at 4.50% in 24, and heading for 4.84%. As to the basic Selic rate for 2024, ending at 12.25% is estimated to peak 14.75% during the next year and ending 2025 at 14%, while the Brazilian economy estimate growth is forecasted at 2,02% up from 2,01%.

Another disturbing issue is the so called fiscal package announced by Lula and Haddad, and approved by Congress before the summer recess, to try and curb expenses and/or raise revenue.

It plans to cut spending by 330 billion R$ some 55 US$ billion, but it is quite messy, includes a reform of the income tax system and several sectors of the Brazilian economy that enjoy special tax benefits are against any such limitations.

With a difficult and changing coalition it is difficult to see how the Lula administration will manage to implement the gradual five year plan to cut expenses. Few in Brazil question Lula da Silva’s political talent, charisma and influence, despite his head injuries and surgery, but not the same can be said of his Finance minister, so there are fears foreign investment will slow down, inflation will continue, so will national debt climbing to some 81% of GDP, with a fiscal budget in the region of 10% of GDP, even when many debt documents are held in the same country.

Haddad has argued that he received government accounts with too much “accounting make up” and “overcoming congressional resistance, despite Lula, won’t be easy, but we will keep track of spending”.

Analysts on the other hand have different interpretations, “Congress is not the problem, problem are parties funds for the next election and changing some budget legislation, plus some judiciary branch exceptional benefits and expenditures”, points out Dharma political analyst Creomar de Souza.

“As during the first government of Lula, he should have applied the fiscal measures at the start, not two years later, “things are far more complicated now, and I don’t know if he will have the big economic expansion boost in time for 2026”

For Claudia Moreno from C6 Bank, things have become so much more difficult because “the cost of a fiscal tightening now is maybe too late, following on the upsurge of the US dollar”. It makes the Central Bank task more demanding and it will have to apply higher interest rates”

Furthermore, “it will have an impact on national debt costs and the fiscal package is tighter to implement every day, with higher interest rates.”