Brazil after Lula’s Return: What Lies Ahead?

Brazil after Lula’s Return: What Lies Ahead?

Read Time: 4 Minutes

Now leading Brazil for a third time, Luiz Inácio Lula da Silva — known by everyone in his country simply by his nickname, Lula — faces challenges far different from those he encountered as President in back-to-back terms that ended in 2010. For a look at what may lie ahead, GLG’s Conor Akin hosted a teleconference in early February with Alexandre Pundek Rocha, a former Senior Advisor at the Central Bank of Brazil. His comments, edited for space and clarity, follow.

What are the main challenges that Lula faces in the months and years ahead?

He is probably going to find this third term much more challenging than the first two. From 2002 to 2006, during Lula’s first term, Brazil was surfing on the wave of the boom in commodities and doing very well economically. The 2008 financial crisis came in the middle of his second term, which he managed well enough to help elect Dilma Rousseff to continue his policies. But corruption scandals precipitated Rousseff’s impeachment in 2016, and in 2018, Jair Bolsonaro was elected President, not so much because voters were pro-Bolsonaro but because they were rejecting the corruption of Rousseff and the political party Lula founded. Similarly, Lula won this time based not so much on his appeal but because of voter displeasure with the way Bolsonaro handled the pandemic.

This time, Lula won by a very slim majority. His and other left-leaning parties account for just 15 of the 81 seats in the Senate, compared with 24 seats held by the right and 42 by independents, so winning over independent senators is key. In the Lower House, Lula’s base holds 139 seats, the opposition 197, and independents 177. This means that getting anything done legislatively won’t be easy, especially with 23 political parties in the House and 15 in the Senate. To help influence votes in Congress, Lula expanded the number of cabinet ministries from 24 to 37 and filled many of them with independents.

Lula’s chief legislative goal is tax reform, which will require a change in the Constitution. Any changes must be approved by a two-thirds vote of Congress. But since Brazil is a federated republic, he will be helped by state governors, who tend to be in favor of reform.

Since Lula’s first two terms, however, the legislative and judiciary branches have expanded their powers at the expense of the executive branch. In addition, during Bolsonaro’s term, the Senate approved greater independence for the Central Bank.

How does the Central Bank’s independence affect him?

The independence of the Central Bank, which is trying to reduce inflation, makes it harder for the government to encourage investment. But that situation is probably temporary. Brazil was probably the first country in the world to start tightening monetary policy and is well on its way to bringing inflation under control. Current Brazilian inflation is now at around 6%, down from 10%, with the 2025 target at 3%. So while interest rates are likely to come down, they are still high, making it difficult for Lula to pursue his social programs.

What are some of those programs?

Lula wants to improve education, changing the emphasis from the university level, which he emphasized in his first two terms, to primary education. One goal is to encourage more technical school attendance to help provide a base for Brazilian economic development.

He also is focusing on the environment, pledging to address problems in the Amazon, especially the burning of the forest for farming. He wants to keep the Amazon free from economic development, and especially from cattle breeding and gold exploration, which are causes of forest destruction. This has been very well received internationally, with Norway and Germany freeing $1 billion in funds to help in the Amazon effort, which had been frozen during the Bolsonaro administration.

What do you see in other aspects of foreign affairs?

Lula wants to improve relations between Mercosur — the trading pact among Argentina, Brazil, Paraguay, and Uruguay — and the European Union. He already has met with President Biden and has scheduled a trip to China. Unlike Bolsonaro, he has condemned the war between Russia and Ukraine and given some support to Ukraine. At the same time, he doesn’t want to cut trade with Russia, which is the biggest supplier of fertilizer to Brazil. The fertilizer is necessary for Brazil to produce the beef and soybeans it exports to Asia, as well as to Europe.

Domestically, what about progress on privatization?

That worries me a bit. Lula’s rise to power was based on union support. In a sense, being anti-privatization is in his genes, so it’s very unlikely that we will see any important privatization of public entities. He also will likely try to thwart privatizations approved by courts. What we are more likely to see are partnerships between the government and the private sector on big infrastructure projects involving water, sewage, ports, and transportation.


About Alexandre Pundek Rocha

Now an independent consultant, Alexandre Pundek Rocha was formerly a Partner at Macrodados Sistemas Gerenciais, where he consulted and advised on Brazilian macroeconomic and political issues, and a Senior Advisor at the Central Bank of Brazil, where he served as the contact for rating agencies doing their due diligence in Brazil.


This article is adapted from the GLG Teleconference “Lula is Back: What Potential Challenges and Changes?” If you would like access to this event or would like to speak with experts like Alexandre Pundek Rochaor any of our approximately 1 million industry experts, contact us.


Key Teleconference Questions:

  • What are Lula’s greatest challenges?
  • What policy changes is he most likely to achieve?
  • Is the return of Bolsonaro a possibility?
  • What key international dynamics are likely to affect Brazil and Lula’s administration?
  • Implications of recent political riots
  • How to accommodate social policies with the Central Bank’s independent monetary policy
  • Challenges of Lula’s relationship with the new congress
  • Challenges of Lula’s relationship with the judiciary
  • Views on environmental policies and climate-focused goals
  • Lula’s views on privatization
  • Outlook on policies pertaining to education, health, social security, and foreign affairs

 

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