Brazil’s Incoming President Faces Challenges in Reviving Struggling Economy

On January 1, Luis Inácio Lula da Silva will be inaugurated as President of Brazil, succeeding Jair Bolsonaro. The election was a nail-biting run-off, with Lula winning by a narrow 1.8 percentage points. Tensions have been running high since then and are expected to remain elevated until Lula’s inauguration.

Lula’s promise to reduce poverty and protect democracy resonated with left-wing voters, while his selection of a centrist running mate, Geraldo Alckmin, won over moderates. In contrast, Bolsonaro’s mishandling of the COVID-19 pandemic and baseless attacks on the legitimacy of Brazil’s electoral system turned off many voters.

The incoming president will face numerous challenges, including a sluggish economy. Inflation is currently at 6%, and high borrowing costs are likely to inhibit investment and consumption. Additionally, concerns over a potential global recession are weighing on commodity markets, leading to predictions of declining prices for Brazil’s key exports (soybeans, oil, and iron ore).

Lula’s previous presidency (2003-2010) was marked by a rally in global commodity prices, which boosted Brazil’s economy along with those of other resource-rich countries in the region. This period saw high budget surpluses, significant infrastructure investment, expanded welfare programs, and falling unemployment. However, after the global financial crisis, economic activity and fiscal discipline waned, particularly during the presidency of Dilma Rousseff.

Today, Brazil’s debt-to-GDP ratio is almost 90%, which carries a high interest burden and limits public spending on education and healthcare. While inflation has moderated recently, the country’s economic situation remains precarious. Lula will have to balance the pursuit of growth reforms with reducing public spending.

Supporters of Brazil's former President and presidential candidate Luiz Inacio Lula da Silva

The Workers Party (PT) has indicated its intention to maintain recently approved social welfare increases, but warns that this cannot be sustained indefinitely. PT economists have also criticized Brazil’s current fiscal rules, particularly the government’s spending ceiling, which limits budget increases to inflation. They argue that the ceiling should be replaced with a new rule that allows spending to grow in real terms and is based on a long-term fiscal scenario for public debt.

In addition to economic issues, Lula will also have to address a number of other challenges, including addressing the COVID-19 pandemic, reducing crime and violence, and improving relations with neighboring countries. It remains to be seen how Lula will tackle these challenges, but his inauguration marks a new chapter in Brazil’s history.

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