Brazil’s Chamber of Deputies has approved the new fiscal framework law and it is expected to enjoy an easy passage through the Senate. This is good news because it reassures the financial markets and the local business community that the government will avoid a populist spending spree.

President Luiz Inácio Lula da Silva (a.k.a. Lula) faces a much rougher ride on other issues from Congress’ conservative majority. The latter quickly forced through legislation which weakened the ministries for the environment and for indigenous peoples, while also restricting the distribution of ancestral lands to indigenous communities. Right and far-right members of Congress have also secured control of select committees which they are expected to use to attack the government. 

A positive factor, however, is that GDP growth in Q1 of 2023 came in significantly above expectations. A strong soya harvest, falling inflation, and the prospect of interest rates reductions in the second half of the year have created more benign business operating conditions. GDP growth in 2023 is therefore likely to be around or above 2%.

Despite this positive atmosphere, Lula will face a tricky time in the next few months. Getting his proposed major tax reforms through Congress will be an uphill task because of its complexity, and also the likely opposition of special interest groups. The government will have to offer compromises in talks with the opposition which, in turn, may demand a price such as more cabinet portfolios. Because of this we believe that the chances of a cabinet reshuffle in the second half of this year are high.

In international relations Lula continues to emphasize Brazil’s claim to a leading role as a member of the ‘global south’ and insists that the BRICS countries can help broker peace talks between Ukraine and Russia. However, a summit of South American leaders to promote regional integration failed to yield concrete results. Lula’s comments on the need to normalise relations with Venezuela have also led to claims that he has been pandering to a dictatorship.

European Commission president Ursula von der Leyen visited Brasilia in mid-June and predicted that the EU-Mercosur Free Trade Agreement (FTA) will be finalised by the end of this year. Approval would boost economic sentiment and be seen as a political victory for the government. But we believe that substantive differences over deforestation and state procurement will take longer to resolve, and that Argentina’s elections will also slow down the process. 

In the energy sector the medium-term prospects for green hydrogen production are extremely positive with existing investment commitments of around US$30 billion. By contrast the prospects for offshore oil and gas development near the mouth of the Amazon are, however, problematic because of environmental protection issues. The chances of them progressing are therefore no more than 50-50. 

The June 2023 issues of Brazil Focus also includes the following:

Politics

• One wedding and a few funerals
• Cabinet changes on the horizon
• Lula’s approval rating faces slow erosion
• Implications

Foreign Relations

• Lula draws criticism over support for Maduro
• Mercosur–EU trade deal still in question

Security

• Lula launches Amazon security programme

Economy & Business

• Q1 GDP data raises optimism over the economy
• Low growth remains a major long-term problem
• Government prepares tax reform package
• Tax breaks designed to boost auto sales 
• North-South rail link completed

Energy Sector

• Swing to green hydrogen gathers momentum
• Brazil’s main green hydrogen projects 
• Petrobras trying again for Amazon drilling rights