- The return of leftist Lula to Brazil’s highest office ends a political phase that began in Mexico in 2018.
- Lula said his country, which is the world’s third-largest exporter of food, “is not interested in exporting”.
- However, Brazil has played an increasingly important role in supplying the world with food in the Ukraine conflict—and it has benefited greatly.
In Brazil’s most difficult election ever, former leftist President Luiz Inacio Lula da Silva returned to power after 13 years with 50.8% of the vote yesterday. It will be his third, non-consecutive term after 13 years in office. Jair Bolsonaro is Brazil’s first democratically elected president not to win a second term and has not publicly accepted defeat.
In his victory speech last night at a hotel in the country’s largest city, Sao Paulo, the 76-year-old Lula spoke of uniting a country so divided, saying “there is only one Brazil,” which seems unlikely because of Lula. they will face fierce opposition in the congressional, senate and international arenas.
The political pivot in Brazil is the latest and most important in Latin America in the last few years. It completes a major shift in the left-wing movement that has taken Latin America by storm since Andrés Manuel López Obrador took office as Mexico’s president at the end of 2018.
Although it is too early to assess the full impact of Lula’s election, here are some recent developments related to the global economy.
Food Products
Brazil is currently the third largest producer of food in the world. It recently dethroned the US as the world’s leading producer of beef and remains the world’s largest exporter of beef.
With a global food shortage due to the war in Ukraine, record drought in Europe and unusual rains in India and China, the South American country has become one of the world’s leading solutions to the problem of food security.
However, in his speech last night, Lula said that Brazil “is not concerned about the trade of goods.” Also, he vowed to give priority to small and medium-sized rural farmers, as they provide the majority of domestic food in his country.
The statement reflects a decline in Bolsonaro’s agricultural policies that led to a two-year shortage of exports to the country due to rising global prices.
Changes in Brazil’s agricultural policy could be a major problem for the world’s food supply, which could lead to higher market prices and higher consumer prices.
Unlike the US, Europe and China – which have already reached the peak – Brazil has been expanding its agricultural land significantly during the Bolsonaro administration. This led to public concern about the environment, especially in the context of deforestation in the Amazon region.
As the president and CEO of AgResource of Chicago, Dan Basse, said in an interview: “We estimate that the world will need to bring in another 25 million acres of produce in the next five years to improve the situation. from South America.”
Petrobras
Although Lula has not mentioned anything about the giants of state-controlled companies, such as Petroleo Brasileiro Petrobras (NYSE:) or Eletrobras (BVMF:), the country’s oil and electricity businesses, his political views show that the government should make major decisions for these companies.
In his previous administration, the president controlled inflation through price hikes in both companies, increasing their costs and causing stocks to gain less over time.
In addition, the massive corruption scandal that engulfed the administrations of Lula and his successor, Dilma Rousseff, helped raise Petrobras to a new level of crisis.
The picture began to change under the presidency of Michel Temer in 2016, when the former president said that the company should sell more oil at prices in line with the US benchmark.
The release of the company was exacerbated by Bolsonaro, who is characterized by a significant reduction in state ownership of common stocks and the sale of many oil exploration licenses to foreign and Brazilian companies.
During this time, the company increased its operating margins and increased savings, resulting in a profit margin of approximately 130% on sales. Petrobras contributed 35%.
However, on the other hand, Brazil’s decision-makers have sharply increased gas prices in 2021 when the country’s income has fallen compared to the rise in global sales.
Also, during Bolsonaro’s tenure, the Brazilian government retained voting control over the company, often to the detriment of the company’s leadership and management. (Read more about Petrobras).
Petrobras is down about 4% as of writing.
Money and the Stock Market
The currency has been one of the few global currencies to gain against the US dollar this year, at around 5%. The main reason is the assumption that the nation’s central bank is ahead of the Fed in monetary tightening.
The base in the country has been running at 13.75%, and, in fact, has decreased in the last three months. it has been declining again, and the figures have been revised upwards, which is a sign that the economy as a whole is still strong in the face of the problems that are happening around the world.
Brazil is also less affected by Russia’s invasion of Ukraine due to its reliance on renewable energy sources, especially hydropower. they have less than 10% of the country’s energy.
This has made Brazil’s stock market one of the world’s leading, with the benchmark up 10% YTD. This optimism has also been reaping the fruits of higher prices due to its strong interest in the agricultural and oil companies.
In his first term, President Lula bet his economic policies on strengthening the country’s internal market by improving the consumption of the middle and lower classes by providing loans and paying social services.
The bet appears to have worked, at least temporarily, as Brazil grew by 4% YoY GDP during the first eight years of his tenure – a period in which the country’s economy rose to the seventh largest economy in the world, briefly challenging the UK for sixth place .
However, the policy also increased the country’s debt, causing Brazil’s economy to underperform for a decade due to a real recession and a troubled credit market.
In addition, Lula adopted a different budget during his first term, which gave his former finance minister, Guido Mantega, more freedom than the country currently sees.
Brazil’s current debt is high due to the health crisis, 13.75% interest rate and the amount of money that Bolsonaro’s government has spent in the last few months to increase its chances in the elections.
Experts say that the combination of the Lula government’s program and the state of the economy in the country is very difficult for the future.
Down Under
It will not be easy to analyze the details of Lula’s policies when his finance minister is unknown to the general public. However, as Felipe Izac, a partner at Nexgen Capital, told Investing.com Brazil, the general conditions remain favorable in the country. “Today, Brazil is doing very well economically, especially compared to developing countries.”
On the other hand, we must note that in his speech last night, the returning president became less friendly to the market than what he did before. However, considering that the president will face a very difficult meeting with the senate, the best chance is that the unusual policy will not pass.
Finally, any changes to Brazil’s food production could have a major impact on an already volatile global market. It will be interesting to see how agricultural markets will react in the short and medium term.
Disclosure: The author has a long position in Petrobras, although he sold his majority stake after the first election this year.
