The technicians from the Brazilian National Development Bank (BNDES) are not one of those who dance samba in the bars of Lapa, on the other side of the aqueduct. But a change of mood was palpable at the headquarters of the public megabank in Rio de Janeiro after the inauguration of Luiz Inácio Lula da Silva in January.
During Jair Bolsonaro's privatization experiment, the BNDES' credit portfolio –reduced rate loans–, which had surpassed that of the World Bank, fell by less than half amid unsubstantiated accusations of corruption in the bank. Likewise, public investment, a crucial engine of the Brazilian economy during the Lula governments between 2003 and 2011, practically disappeared.
Now the presidential will to place the State in the role of locomotive and reactivate an economy that is stagnating again, after a brief post-pandemic upswing, returns. “The BNDES is back!” insisted the new president of the bank, Aluizio Mercadante, during a seminar held at the bank's headquarters. “We want to double our loans; thus we will reactivate investment and production”, he added.
Lula has repeated in recent weeks his support for a recovery plan based on fiscal expansion and public investment. Petrobras, the state oil company, which was partially privatized by Bolsonaro after becoming the main target of the anti-corruption investigation called Lava Jato, has already initiated a policy of reducing fuel prices to help long-suffering consumers.
It seems the ideal time for a return to the Brazilian developmental State, in which public investment and expansive fiscal policies also create a favorable environment for private investment. After all, as Mercadante highlighted in his speech, this is exactly what is done with the billion-dollar reactivation plans and industrial policies implemented in the US and the European Union.
But in Brazil there is a problem: the veteran leader of the Workers' Party (PT) and his heterodox economists in development institutions do not even have the support of their own political and media allies on the broad electoral front. In Congress, the center bench sets impossible conditions and the Bolsonaro opposition, coordinated by the conservative president of the chamber, Arthur Lira, has no interest in approving a fiscal expansion plan that will reactivate the economy and raise expectations of re-election for Lula or another PT candidate.
At the same time, the central bank, under the direction of the hawk and former CEO in Brazil of the Santander bank Roberto Campos Neto, maintains a draconian monetary policy based on the highest real rates in the world, with the interbank reference rate at 13. 75%, twice as much as inflation. “It is the perfect recipe to kill any economy”, ironized the American Nobel Prize winner Joe Stiglitz, during the same BNDES conference. The Brazilian State dedicates an average of approximately 100,000 million euros a year to pay the interest on its debt.
According to a report by the Center for Economic Policy and Research (CEPR) in Washington, only Yemen, The Gambia and Lebanon pay more in terms of GDP. “Brazil is a masochistic country”, summed up the Indian economist Jayati Ghosh in her speech at the BNDES. Campos Neto responds that he complies with his mandate to lower inflation to the target of 3.25% for this year.
The financial markets – guardians of rationality according to the big media in Rio and Sao Paulo – defend monetary policy. “These guys are justified,” Alberto Ramos, an economist at Goldman Sachs in New York, said in a telephone interview. "What kills economies is inflation, a silent killer that erodes the horizon for investors and reduces disposable income."
As for fiscal policy, Ramos regrets that Lula has decided "to count on an unpredictable increase in collection as opposed to controlling spending." These are ideas that are repeated, albeit in a low voice, even in the government itself, where centrists like Geraldo Alckmin, the vice president, and Simone Tebet are more neoliberal than developmentalists.
Faced with this barrier of obstacles, the pragmatic finance minister and former PT presidential candidate, Fernando Haddad, has just announced a cautious and Solomonic spending plan that aims to satisfy everyone. But maybe no one likes it. At stake in this battle is the future of the new government and Lula's attempt to finish the job started 20 years ago: ending poverty and promoting development in the country that he always promises and always disappoints. Without an economic recovery, the 77-year-old president will not be able to keep his promise to solve the new hunger crisis, with 30 million Brazilians suffering from food insecurity.
The meager GDP growth forecast for this year –only 0.9% and barely 1.4% forecast for 2024– would constitute a political death sentence for the Government. Lula is aware of this. “I do not accept the negative evaluations that the economy is going to grow very little this year; We are going to see what happens when the companies invest again, ”he said, recalling the virtuous cycle of his first governments.
But the truth is that, without greater fiscal stimulus and less restrictive monetary policy, it is hard to imagine what the engine of growth or the source of investment will be.
The first measures of the new government will be slightly expansive for the economy this year, calculate the analysts consulted in Brazil. A rise in the minimum wage, currently about 300 euros a month, 1.5 percentage points above the inflation rate, will stimulate consumption, since more than half of the population earns only two minimum wages. The same will happen with the adoption of a new anti-poverty program, Bolsa Família, which will provide 600 reais a month to poor families, plus 150 reais if they have small children. Employment insurance and other benefits are restored and the salaries of health workers and public education will be increased.
To finance this, Lula managed to agree in December to lift the draconian ceiling on public spending adopted in 2015 for one year. "Fiscal policy is going to be expansive in 2023," said Ricardo Summa, from the Federal University of Rio de Janeiro. . "But then it's hard to know what Congress will do."
Without rate cuts, this meager fiscal stimulus will be all there is. Lula and her allies have repeatedly lashed out at the central bank, but to no avail. “These are types of pornographic interests,” said Josué Gomes da Silva, the president of the powerful Sao Paulo federation of industries (FIESP), now allied with Lula despite leading protests in favor of his imprisonment seven or eight years ago. .
In a perverse vicious circle, the central bank warns that criticism makes a rate cut even more difficult. Likewise, Campos Neto – who was appointed by Bolsonaro – has hinted that an overly expansive fiscal plan would also make it difficult to lower interest rates. "You have to explain these interest rates as a measure of political pressure," said economist Fernando Lara, from Unisinos University in Porto Alegre.
Despite the fears about the debt in emerging markets, the concern in the markets about the Brazilian public debt – around 73% of GDP – is exaggerated, explains Lara. “In the past, Brazil had problems due to the balance of payments and debt denominated in dollars. Now the external debt is zero and there are large foreign exchange reserves (360,000 million dollars). The difference with Argentina, for example, is abysmal”, said Lara.
It is still true, however, that the international environment does not help the central bank to lower rates. “If the US keeps raising its rates, there isn't much room to lower ours and at the same time keep the exchange rate stable,” Summa said.
After meeting with Campo Neto, Haddad has opted for a relatively conservative fiscal framework to replace the spending ceiling. He sets a target for the primary budget deficit/surplus – not including the cost of debt service – to hit zero by mid-decade and then into surplus. The 2.5% annual increase in primary spending is only half of what was adopted during Lula's first governments, when average GDP growth stood at 4.5%.
The plan "will make it possible to escape from the straitjacket of the spending ceiling, but it will not allow for fiscal expansion or a level of public investment as with the first Lula governments," says Julia Braga, of the Fluminense Federal University, in Niteroi. The investment “will have to be through public-private partnerships,” she adds. In this scenario, the BNDES subsidized loans may be more important than ever.
