Brazil seduces skeptical foreign investors with a new tax plan

Business and political leaders from Brazil are on tour, lobbying for investment in the Latin American oil producer, while trying to assuage concerns about the leftist president’s costly spending list Luiz Inacio Lula da Silva.

The rebound in commodity prices and the independence of its central bank made Brazil a favorite emerging market for investors last year. But its economy, battered by COVID-19 like that of other emerging oil-producing markets, emerged weak from the recession. The International Monetary Fund forecasts tepid economic growth of 0.9% this year.

At the “Lide Brazil” investment conference in London on Friday, investors and political leaders said that the fiscal framework that President Lula sent to Congress last week allayed concerns that his ambitious social spending targets would skyrocket the deficit, and increased its attractiveness to investors.

“This is a positive environmentJoel Virgen Rojano, director of Latin America strategy at TD Securities, told Reuters. “There are clear anchors, clear rules”.

The long-awaited framework would allow expenses to grow up to 70% of the observed increase in recurring revenues, with the aim of keeping public debt sustainable.

Senate President Rodrigo Pacheco told the conference, the Lide group’s first face-to-face international event since the pandemic, that lawmakers would move quickly to approve the bill, which also seeks to curb an upward spending trend fueled by uncertain profits. extraordinary.

“We will be very quick to pass the substance of the bill, although we will have some changesPacheco said, adding that lawmakers needed to move quickly on tax reforms that are critical to the government’s revenue targets.

Remove tail risks

Since Lula’s return to power on January 1, Brazilian markets have behaved unevenly, in a context of interest rates at six-year highs and concerns about the feasibility of ambitious growth targets for public revenues.

The real hit its highest level in 10 months this month and hard-currency bonds returned nearly 4% in the first quarter. A $2.25 billion dollar bond offering – the first in a year and a half – was oversubscribed.

But stocks are in the red in dollar terms in 2023 compared with small gains in broader emerging markets and a more than 20% rise in Mexico stocks.

Shares rose after Lula introduced the fiscal framework bill.

Wall Street bank JPMorgan confirmed last week that it is overweight Brazilian stocks, citing hopes that a possible interest rate cut soon would boost equities.

The new framework will alleviate some concerns about the deficit.

“Removed some of the risks of something completely unorthodox happeningsaid Jared Lou, a portfolio manager at William Blair Investment Management. “We did not see very extreme policies being promoted. So that has caused some compression in credit spreads.”.

Views that US interest rates are nearing a peak, which could soften the dollar and strengthen other currencies, is sparking interest in emerging markets and could also boost Brazil.

However, for many, the waters are still unclear.

“It seems to me that there are many things that can go wrong.said William Jackson, chief emerging markets economist at Capital Economics. “This fiscal rule only works if the government can increase revenue quite significantly.”.

Ronaldo Patah, Brazil investment director at UBS Wealth Management, said that despite the uncertainties, Lula’s tax reform suggests he has shifted his focus forward – and away from undoing previous reforms.

“This is a better environment”, he claimed. “Foreign investors have good will for Brazil: they want to invest.”

Source: Reuters