GDP growth to lose momentum
Growth momentum is expected to lose steam in 2024 as the strong agriculture outcome (7% of 2023 GDP) achieved in 2023 (with an annual expansion of 15%) will not be repeated. This time around, the sector has been affected by adverse weather conditions related to the El Niño phenomenon. In March 2024, the National Supply company (CONAB) expected the grain harvest to drop by 8% year-on-year, from the 2023 record high output. Meanwhile, household consumption (67% of GDP) should be the main source of growth, supported by social benefits, easing inflation and the job market remains tight (real wages on the rise). These should prevail over the still restrictive monetary stance. While the central bank has eased interest rates since August 2023 (from 13.75% to 10.75% in March 2024), real rates should remain high throughout the year. Furthermore, the economy is also starting to feel the lagging passthrough of lower policy rates. That said, the business payment experience, which strongly deteriorated in 2023 (after being well controlled for many years), is expected to remain sensitive in 2024. Contrary to household consumption, gross fixed investment (18% of GDP) is likely to register a timid expansion, coming from a weak comparison base (the index dropped by 3% in 2023) and as credit conditions slowly improve. Last, export (15 % of GDP) growth momentum should lose strength due to decelerating activity in main export markets (including China and the US), relatively lower average commodity prices and falling volumes in agricultural exports. Despite this, oil exports (2% of GDP) is expected to increase in line with rising domestic production related to the pre-salt oil field.
Sound external accounts diverge from persistently wide fiscal deficit
Brazil’s external shortfall is expected to improve marginally in 2024. This should be driven by some narrowing of the large primary income deficit (3.3% of GDP in 2023), which will likely be curtailed by the drop in repatriated foreign investment income (mainly associated with lower commodity prices). In addition, the services deficit (1.7% of GDP) should marginally shrink, owing to a lower travel deficit. On the contrary, the trade balance surplus will still be robust (3.7% of GDP), though its amount should be slightly smaller. Imports should rebound somewhat (buoyed by a resilient domestic demand and relatively lower interest rates improving foreign capital goods purchases), outpacing the rise in exports. On the financing side, foreign direct investment (2.9% of GDP) will continue to comfortably cover the external shortfall. Meanwhile, foreign currency reserves will remain robust (ensuring an import coverage of 17 months as of December 2023). Last, total gross external debt (including intercompany loans and domestic fixed income securities held by non-residents) stood at 33% of GDP in January 2024, with its public share representing 5% of GDP.
On the fiscal front, in 2024, the budget deficit is set to fall, but will still remain high. The relatively lower shortfall can be explained by the fading effect from the one-off payment, in late 2023, of court-ordered debts that had accumulated since 2021 (equivalent to 0.9% of GDP), and slightly lower interest expenditure. While policymakers will strive to pass measures to improve tax collection (such as a gradual resumption of payroll tax), they are expected to be watered down somewhat by Congress. That said, the government will likely fall short of reaching the 0.1% primary fiscal deficit target established for 2024. That said, overall, the already high level of gross public debt (although 95% is domestically-owned) is set to further increase in 2024. It is worth bearing in mind that a new fiscal framework was approved in Congress in August 2023. It defines that the real growth rate of primary spending may vary between 0.6% and 2.5% per year or correspond to 70% of revenue growth. Every year, expenses will grow by at least 0.6%, up to a maximum of 2.5%, even if the application of 70% rule results in a higher value. While this new rule does not guarantee a downward trajectory for public debt (its effectiveness relies on the capacity to increase public revenues), it will prevent an explosive trajectory of the debt-to-GDP ratio.
Time running out to pass reforms in 2024 with municipal elections in sight
In his first year in office in 2023, the leftist government of Luiz Inácio Lula da Silva (better known as Lula) managed to push the new fiscal reform package through the predominantly centre-right Congress. The aim of the long-awaited reform was to unify consumption taxes and other bills to increase tax revenues (such as changes to the taxing of offshore companies and exclusive funds). In addition, the Lula government unveiled a new infrastructure plan, the so-called New PAC (Programa de Aceleração do Crescimento) in August 2023. In the pipeline is roughly USD 340 billion in investments by 2026 (16% of GDP) of which USD 280 billion has been earmarked for new highways, ports and energy efficiency, among others. The resources will come from the general budget (22%), state-owned companies (20%), state-owned bank financing (21%) and private sector (36%). In addition, in January 2024, the government presented its 'New Industry Brazil' law with the aim of combatting deindustrialization to the tune of a total of USD 60 billion (2.8% of GDP). Over the next ten years, the new policy will target several areas: agroindustry, bioeconomy, health industrial complex, infrastructure, sanitation, housing, mobility, digital transformation and defence technology. Credit lines, government subsidies, and local content requirement in industrial production are planned to encourage national companies. Nonetheless, these two initiatives met with a lukewarm reception from the market, which is somewhat cautious about their possible fiscal impact. Nonetheless, an intended income tax reform may not advance in Congress in 2024. Municipal elections will be held in October 2024 – voters will choose mayors and councillors of 5,570 municipalities – making the legislative calendar more restrictive this year. Lawmakers will tend to prioritize the regulation of the 2023 consumption tax reform. Importantly, the elections are approaching at a time when the government is experiencing some decline in popularity. According to a March 2024 survey by the Atlas Intel institute, the approval rating for the Lula government weakened. According to survey results, 47% of Brazilians approved of his performance, down from 52% in January. In addition, the disapproval rate went up from 43% to 46%. As for foreign policy, in March 2024 the government toughened its tone with the Venezuelan government of Nicolás Maduro when it expressed concern about the process of the elections scheduled for July in the neighboring country, given the impediment to the registration of several opposition candidates. Meanwhile, negotiations have stalled with Paraguay on the bilateral treaty governing their Itaipu hydroelectric dam that expired in August 2023. Asuncion aims to sell its unused share of electricity production to third-party countries at a higher price, a practice which has been prohibited for 50 years. Last, regarding the stalled trade agreement between Mercosur and the European Union, Lula defended its ratification during a visit to Brazil, in March 2024, by French President Emmanuel Macron, who opposes it and claims that more work is needed on the climate and biodiversity issues.