By Gabriel Burin and Valentine Hilaire
BUENOS AIRES/MEXICO CITY (Reuters) – Brazil’s slowing economy is likely to remain weak in 2023 as a planned spending boost from newly-elected President Luiz Inacio Lula da Silva risks keeping already high borrowing costs elevated for longer, a Reuters report revealed Survey of Economists.
Lula’s government, which came to power on January 1, is increasing the scope of welfare programs well beyond strict budget limits to address deep-rooted social problems. The government of former President Jair Bolsonaro did not follow these rules either.
However, many investors and analysts fear a new wave of planned spending could push Brazil’s debt down an even more unsustainable path and fuel inflation, which is falling after a long string of rate hikes.
Given its worries, the central bank will keep interest rates high for a long time, but that could amplify an economic slowdown and fuel tensions with the government.
Growth is forecast to rise to 0.8% in 2023 from 3.0% last year, according to median estimates from 44 economists polled between Jan. 9 and 20. The growth forecast for this year was unchanged from an October survey and has been raised for 2022 from 2.7%.
“The main reason for our negative outlook is the implemented fiscal policy,” said Tomas Goulart, economist at Novus Capital. Its growth forecast for this year was just 0.5%.
With a possible reintroduction of taxes on fuel to fund additional spending measures, “inflation will hover around 5.0% in 2023 and the central bank will be unable to lower its Selic rate, hampering growth for the next few years would diminish,” he added.
This month, bank chief Roberto Campos Neto cited a likely reintroduction of taxes on fuel as one of the main reasons behind his forecast of 5.0% inflation in 2023 – a result that would exceed the 4.75% target for a third year .
Finance Minister Fernando Haddad unveiled a tax program to address market concerns. Still, he said it’s just a list of proposals that Lula has yet to approve and are prone to “frustrations” as well as unexpected expenses.
UPCOMING TAX REFORM
Recently quiet domestic markets could be tested after the Southern Hemisphere summer break and the Mardi Gras holiday as the government begins to push lawmakers to vote on tax reform in the first half of the year.
“There is a risk of higher inflation with the pass-through (to consumer prices) of a more depreciated exchange rate in the event of more severe fiscal deterioration,” said Mauricio Nakahodo, senior economist at MUFG.
To a separate question on the overall trend of Brazil’s GDP growth in 2023, a slim majority of seven out of 12 respondents answered that it was sloping down, while three saw upside potential and two answered neutral.
Headwinds hitting Latin America’s No. 1 economy should be offset somewhat by improving terms of trade on rising commodity prices from China’s reopening and the impact of Lula’s policies on aggregate demand.
Estimates for Brazil’s growth in 2023 ranged from stagnation to 1.5%, while forecasts for Mexico ranged from a 0.5% contraction to 1.7% growth, with the survey median pointing to a slowdown of 3.0% in 2022 to 1.0% this year.
Regarding the Mexican economy, analysts at Citi said in a report they expected activity to slow “as US economic expansion loses traction, job market improvement slows and (and) real interest rates rise.”
But unlike Brazil, where there is friction between the central bank and the government, Mexican President Andres Manuel Lopez Obrador has praised policymakers for their work and boosted business confidence.
Also, the Mexican peso traded close to three-year highs against the US dollar, reflecting a much more subdued political climate compared to the chaos on the streets of Brasilia this month.
(For other stories from Reuters Global Business Survey:)
(Reporting by Gabriel Burin in Buenos Aires and Valentine Hilaire in Mexico City; Polling by Mumal Rathore, Shaloo Shrivastava and Vijayalakshmi Srinivasan in Bengaluru; Editing by Ross Finley and Tomasz Janowski)