Environmental ambiguity likely to draw criticism for Lula in New York

President Lula is expected to address the climate crisis, conflicts, and global financial reforms in his speech at the UN General Assembly

09/24/2024

President Lula in New York with European Commission President Ursula von der Leyen — Foto: Ricardo Stuckert/PR
President Lula in New York with European Commission President Ursula von der Leyen — Foto: Ricardo Stuckert/PR

The climate crisis, conflicts in Europe and the Middle East, and the urgent need for reforms in multilateral mechanisms will be at the center of President Lula’s speech this Tuesday at the United Nations headquarters in New York. However, the ambiguity in his environmental discourse—balancing Brazil’s desire to lead on green issues while simultaneously pursuing the exploitation of the last drop of oil—will not escape the scrutiny of more critical analysts.

As is customary, Mr. Lula will be the first leader to speak right after the secretary-general of the United Nations, António Guterres, and the president of the 79th United Nations General Assembly, Philémon Yang.

Climate, wars, and UN and multilateral reforms are “inescapable topics,” a government official told Valor. Brazil is experiencing unprecedented droughts and wildfires across the country. In May, the state of Rio Grande do Sul endured the devastation of severe flooding.

Considering the extreme climate impacts on Brazil, Mr. Lula is expected to call out industrialized nations for their role in the global crisis, emphasizing the delay in fulfilling the promise to allocate $100 billion annually to developing nations starting in 2020. This target was only met in 2022, two years later, with nearly 70% of the total coming in the form of loans.

On Monday, President Lula held three bilateral meetings—with German Chancellor Olaf Scholz, European Commission President Ursula von der Leyen, and Haitian Prime Minister Garry Conille.

With Germany, he continued discussions from last November in Berlin regarding cooperation on renewable energy and hydrogen. With Ursula von der Leyen, Mr. Lula discussed advancing the conclusion of the agreement between the European Union and Mercosur. With Garry Conille, the Brazilian president committed to helping Haiti and mobilizing other powers to do the same.

The most uncomfortable situation for Mr. Lula so far in New York was a meeting kept off the official agenda—a one-hour session with the global CEO of the British oil company Shell, Wael Sawan, and the president of Shell Brasil, Cristiano Pinto da Costa.

As reported by BBC Brasil, the meeting took place Monday morning at the residence of Brazil’s permanent representative to the UN, Ambassador Sérgio França Danese, where Mr. Lula and First Lady Rosângela da Silva are staying. Presidential aides told the BBC they had been instructed not to disclose the meeting.

Mr. Da Costa told Valor earlier this month that Shell is considering exploring oil areas on the Equatorial Margin, particularly in the basin at the mouth of the Amazon River, should the government decide to move forward in the region stretching from Amapá to Rio Grande do Norte.

Another important event on President Lula’s agenda this Tuesday at the United Nations will be a conference co-organized by the Brazilian president and Spanish Prime Minister Pedro Sánchez. “It will not be a gathering of left-wing leaders but a defense of democracy and a stand against extremism,” a government official said.

Leaders such as Justin Trudeau (Canada), Gabriel Boric (Barbados), Gustavo Petro (Colombia), Emmanuel Macron (France), and Charles Michel (President of the European Council) are expected to attend. However, the U.S. will likely send a lower-ranking official, Deputy Secretary of State Kurt Campbell, as reported by Folha de S.Paulo.

The meeting, titled “In Defense of Democracy: Combating Extremism,” is a key item on the Brazilian president’s agenda in New York. Mr. Lula reportedly invited Joe Biden in a phone call back in July.

On Monday night, there was some tension between President Lula and Mr. Biden’s security team at an event hosted by former U.S. President Bill Clinton’s foundation. Mr. Biden had confirmed his attendance at the last minute, leading to heightened security measures, including the arrival of U.S. Secret Service agents. When the Brazilian delegation arrived, some members were denied entry. Protocols were broken, with demands to search ministers and ambassadors. President Lula, reportedly irritated, canceled his participation.

President Lula then attended a Bill and Melinda Gates Foundation event, where he participated in a talk show-style discussion with Bill Gates and received an award for his fight against poverty and hunger.

Mr. Lula was sharply critical of global wealth concentration during his remarks, highlighting the poor’s lack of access to decision-making platforms. “It’s not acceptable that a single individual has more money than Brazil, with its 200 million inhabitants.”

In a highly critical tone, Mr. Lula pointed to the ineffectiveness of the UN’s decisions, continuing the theme of his Sunday speech in New York.

“The world is ungoverned, no one respects anyone. The UN had 51 member countries at its founding in 1945, now there are 193. More than 140 didn’t participate in the creation of the UN. It had the strength to create the State of Israel, but the UN doesn’t have the courage to create the State of Palestine,” he said, earning immediate applause from the hundreds of people in the auditorium.

He continued by stating that current geopolitical conflicts, such as Russia’s war against Ukraine and Israel’s occupation of Gaza, could have been avoided “if the UN fulfilled its role as a global power.”

One of Mr. Lula’s final events in New York before returning to Brazil will take place on Wednesday, when he will open the second meeting of G20 foreign ministers at the UN headquarters. For the first time in history, the world’s largest economies will jointly call for reforms to the multilateral system.

*Por Daniela Chiaretti, Naiara Bertão — New York

Source: Valor International

https://valorinternational.globo.com/
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Brazil reinforces commitment to sustainability

First Lady Rosângela da Silva says Brazil experienced setbacks in public policies

09/20/2024

Speaking at the SDGs in Brazil, an event held by the UN Global Compact Brazil on Thursday (19), in New York, Ambassador Sérgio Danese emphasized the importance of sustainable development as one of the fundamental pillars of international politics. He highlighted the importance of the 2030 Agenda and the Sustainable Development Goals (SDGs) as a crucial achievement in Brazil’s advocacy for multilateralism and global cooperation.

According to the ambassador, Brazil has been a historic advocate of development as one of the three fundamental pillars of the United Nations, alongside peace and security. “Brazil is seeking to convey the message of the importance of sustainable development as one of the pillars of global politics,” he affirmed.

During the event, Mr. Danese emphasized that Brazil is launching the Global Alliance against Hunger and Poverty, within the G20. The proposal aims to create international synergies to combat poverty, including the creation of a database of social policies and promote an exchange of knowledge and strengthening of instruments to combat poverty on the global stage.

The ambassador also highlighted Brazil’s advances in social policies, citing the latest UN State of Food Security (SOFI 2024), released in July. “The UN report shows that severe food insecurity fell by 85% in 2023 when 14.7 million people were spared from going hungry in the country,” he said.

Despite the advances, the ambassador warned of the challenges still faced by Brazil in the environmental sphere. He mentioned the recent flood disasters in Rio Grande do Sul and the fires currently destroying parts of the national territory as some signs of the urgency of stronger actions to mitigate climate change.

At the event, First Lady Rosângela da Silva said the country experienced “setbacks” in recent public policies and cited COP30, which will take place in Belém in 2025, as a crucial opportunity to advance global climate negotiations. She emphasized the importance of the conference in addressing environmental challenges, especially in the Amazon rainforest, and restoring Brazil’s leading role in the fight against climate change.

Ms. Silva cited the crucial role of the next Climate Conference (COP30) in Belém in advancing global climate negotiations. According to her, when the 2030 Agenda was launched, in 2015, UN countries were committed to maintaining progress on the Millennium Development Goals. However, Brazil went through a period of dismantling and setbacks, which negatively impacted its ability to achieve the established goals.

*Por Robson Rodrigues — New York

Source: Valor International

https://valorinternational.globo.com/
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Central Bank pushes futures interest rates higher, boosts real’s value

The hawkish stance taken by COPOM on Wednesday strengthens the Brazilian currency, which stood out during the session; Ibovespa closes lower

09/20/2024

Luís Garcia — Foto: Rogerio Vieira/Valor
Luís Garcia — Foto: Rogerio Vieira/Valor

The more hawkish tone adopted by the Central Bank’s Monetary Policy Committee (COPOM) triggered a significant adjustment in domestic assets during Thursday’s session. Markets have now fully embraced the likelihood of an accelerated Selic policy interest rate hike from November, leading to a surge in future interest rates and a drop in Brazil’s benchmark stock index (Ibovespa). However, the Brazilian real gained from the widening interest rate differential, driving the foreign exchange rate to its seventh consecutive decline and marking its lowest level in a month.

In the digital options market for the November COPOM meeting, the probability of a 50-basis-point rate hike reached 65% by the end of the day, compared to a 22% chance of a 25-basis-point increase and a 9% likelihood of a more aggressive 75-basis-point hike.

“The odds of a 50-bp increase at the next meeting have risen,” noted Evandro Buccini, manager at Rio Bravo Investimentos, though he expressed surprise that the real’s appreciation wasn’t as pronounced as the upward shifts in the futures yield curve throughout the day.

The exchange rate finished the session down 0.70%, at R$5.4241. Meanwhile, Brazil’s interbank benchmark rate, known as CDI, for January 2026 surged from 11.77% to 12.05%, with the curve now pricing in a Selic rate of approximately 12.5% by the end of the tightening cycle.

Market participants highlighted several key points from the COPOM statement, including a positive outlook on the output gap (the measure of economic slack), an upward revision of inflation projections over the relevant horizon, and concerns about unanchored inflation expectations—all of which could justify a more forceful start to the tightening cycle.

Contrary to the prevailing market view, Camilo Cavalcanti, partner and manager at Oby Capital, sees the COPOM’s announcement as balanced and does not signal a more aggressive pace of interest rate hikes. “We interpreted the statement as more neutral. The language seemed more like a defense of the initial interest rate adjustment rather than guidance suggesting an accelerated pace,” Mr. Cavalcanti explains. He expects more clarity when the minutes are released. Mr. Cavalcanti also noted that the Central Bank’s acknowledgment of the output gap as positive was more of a formality, aligning with market expectations.

In his assessment, the market’s reaction during the session was “exaggerated,” and he predicts the COPOM will likely maintain a more gradual pace of 25-bp Selic rate increases per meeting until January 2025, with the rate ending at 11.5%. He pointed to the fact that the projection horizon will soon include the second quarter of 2026, which may show more moderate inflation and reduce the need for aggressive hikes.

As traders await the COPOM’s minutes to refine their Selic rate forecasts, which should be released in the next week, the real strengthened, ranking among the day’s top-performing currencies due to the rising interest rate differential, which favors bets on its appreciation.

Jorge Dib, manager at Galapagos Capital, sees a positive outlook for the real if U.S. data holds no surprises. “Among Brazilian assets, what we like today is the real,” he said, revealing a long position on the Brazilian currency against the dollar. He emphasized the real’s liquidity among emerging market currencies, making it an attractive option for quick inflows and outflows.

Mr. Dib believes the U.S. yield curve has already priced in a substantial rate cut. “At some point, the market may even push up long-term interest rates in the U.S., which could slow the demand for the Brazilian currency,” he notes, though he still expects the real to appreciate in the short term. For Mr. Dib, the current environment suggests a stronger real, not just against the dollar, but also compared to other currencies like the Mexican peso.

According to Luís Garcia, CIO of SulAmérica Investimentos, the growth differential between Brazil and the U.S. is more significant for the real’s performance than the widening interest rate gap between the two countries. “Both the U.S. Federal Reserve and the Central Bank are making monetary policy decisions based primarily on the overall health of the economy, with less focus on short-term inflation changes,” he explains. “This sends a strong signal that the relative performance of the two economies is diverging.”

Mr. Garcia notes that while Brazil’s economy is delivering positive growth surprises, the U.S. economy is starting to show signs of slowing. “This growth differential is more impactful than the interest rate spread alone.”

“Previously, the interest rate differential was a factor, but now, with the added growth differential, the outlook for the real is even more favorable,” says Mr. Garcia. He sees potential for further appreciation of the Brazilian currency. Because of this combination’s promising potential, the executive believes there is room for further appreciation of the real. “Of course, we’ve gained some support from the international market, but the fiscal debate remains critical,” he adds.

The surge in future interest rates directly impacted the Ibovespa, which closed down 0.47% at 133,123 points, marking an intraday low in a session marked by volatility. “With the COPOM’s tougher stance, investors are likely repricing the entire curve, which isn’t beneficial for the stock market in the short term,” says Alexandre Póvoa, strategist at Meta Asset Management. However, he believes that rising Brazilian interest rates, backed by credibility coupled with a decline in U.S. rates, could ultimately favor the Ibovespa in the long term.

Among the blue chips, Vale’s common shares were a highlight, gaining 1.20% to R$58.23, driven by an increase in iron ore prices.

Mr. Buccini, from Rio Bravo, notes that he sees value in holding a long position in Vale, citing iron ore’s solid but volatile performance. He acknowledges that Vale’s stock has suffered due to weaker growth prospects in China but argues that the slowdown has likely reached its peak, leaving room for potential recovery in the raw material’s performance.

*Por Arthur Cagliari, Bruna Furlani, Gabriel Caldeira, Maria Fernanda Salinet — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Goldwyn president lists urgent reasons for energy transition

Brazil has access to clean energy, which is an advantage, David L. Goldwyn says

19/09/2024

The energy transition to a low-carbon model is critical for at least three reasons, said David L. Goldwyn, president of Goldwyn Global Strategies.

One reason is the very extreme environmental consequences, such as those seen in Brazil, Europe, and the United States. Another is geopolitical, with climate migration having very serious impacts, such as civil unrest. The third is opportunity. “We are talking about a transformation of the global economy and this is a tremendous opportunity for jobs for Brazil,” he summed up.

Mr. Goldwyn pointed out that Brazil has access to clean energy, which is an advantage. “But it takes a lot of political work to get to where we want to be.”

*Por Valor — New York

Source: Valor International

https://valorinternational.globo.com/
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H&M set to open first stores in Brazil in second half of 2025

Swedish fast-fashion chain expects to have stores nationwide within three years

09/19/2024

H&M will also sell products made in Brazil, in addition to imported items — Foto: Casper Hedberg/Bloomberg
H&M will also sell products made in Brazil, in addition to imported items — Foto: Casper Hedberg/Bloomberg

Swedish fashion chain H&M will open its first stores in Brazil in the second half of 2025, the company said on Wednesday, in its first interview since revealing its entry into the country, which was announced by the group in 2023.

Valor has learned that the stores are expected to open between September and October of next year, in the cities of São Paulo and Rio de Janeiro. The first stores will be launched in Allos, Iguatemi, and Multiplan malls, as Valor previously reported.

The company has not confirmed these details. However, it stated that contracts have already been signed for the first two stores, said Maria Fernanda De Luca, H&M’s chief financial officer in Brazil.

“There is a well-researched strategic plan in place, and the pace of expansion will, of course, depend on the results [of the stores],” she said. “We had to explain to them [the controlling shareholders] that we are full of regulations, bureaucracies, and that it is already a complex subject to discuss. It’s even a bit embarrassing to address this because it truly takes time to get certifications and approvals, which surprised them quite a bit, as they couldn’t understand it,” she said during a presentation at the Latam Retail Show on Wednesday evening.

After being asked at the event in São Paulo, the company confirmed that, within a maximum of three years, it will have stores in every state. “Perhaps even before that,” Ms. De Luca said. If this progresses, an average of 8 to 9 stores will be opened each year.

Additionally, the plan is to enter the country with “affordable prices,” Ms. De Luca said, ensuring a competitive market position. Other foreign chains, like Zara, have a more premium brand positioning in Brazil.

H&M will also sell locally produced products, in addition to imported items, following a strategic shift by the global leadership.

“When I joined the company, the plan was for everything to be imported, but over time, the global team realized that it wouldn’t be feasible. Some things simply can’t be imported. So, we are working with local partners to purchase national products,” the CFO explained.

When asked about the risks other foreign brands faced in the country, like Forever 21, which ceased operations in Brazil after a few years, the executive dismissed such concerns.

“H&M has never exited any market it has entered, except for Russia, by choice. There’s no point in discussing the economy—we believe in our product. All the markets where we still operate speak for the company,” Ms. De Luca said.

“The Swedes conducted an in-depth study of all the local competitors. We have a luxury partner with expertise here who is also helping us,” said Augusto Krambeck, H&M’s director of human resources, at the event.

He added that the retailer would almost immediately begin omnichannel operations in the country. In other words, the website and store sales channels will already be integrated.

“It will take one to two months to launch the omnichannel,” Mr. Krambeck said.

He noted that H&M has been planning its entry into Brazil for the past ten years. “It’s been ten years of monitoring, ever since we started in Chile. We didn’t come here with just a year and a half of planning. The fact is, Brazil has been through a lot—World Cup, Olympics, recession, impeachment. And H&M wanted to create a ‘buzz.’ This entry would have gone unnoticed,” he said.

H&M has 51 stores and 3,800 employees in Chile, Peru, and Uruguay, after a decade of operations in these countries.

*Por Adriana Mattos, Valor — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Petrobras foresees $11.5bn investment in renewable energy

Director said company has reduced greenhouse gas emissions by 40%

09/19/2024

Mauricio Tolmasquim — Foto: Vanessa Carvalho/Valor
Mauricio Tolmasquim — Foto: Vanessa Carvalho/Valor

Maurício Tolmasquim, executive director of energy transition and sustainability at Petrobras, said on Thursday (19) that the state-owned company has set aside $11.5 billion to investments in renewable energies.

In a presentation at the Brazil-US Climate Impact Summit 2024, organized by Valor and AmCham at the United Nations (UN) headquarters in New York, Mr. Tolmasquim pointed out that the company has already reduced its absolute greenhouse gas emissions by 40% and its methane gas emissions by 70%. The company will allocate 11% of its investments to the energy transition.

According to him, these amounts are three times higher than emissions from Brazilian domestic aviation.

Mr. Tolmasquim, who used to be president of the Energy Research Company (EPE), responsible for planning the sector in Brazil, pointed out that the goal of limiting the rise in temperature to 1.5 degrees Celsius implies a 7% annual reduction in greenhouse gas emissions.

The Petrobras executive stressed that this 7% drop is equivalent to what happened during the COVID-19 pandemic. “We’d need one COVID a year to meet the target. So we can see the size of the challenge,” he said, noting that this reduction, unlike what happened during the pandemic, should happen without the impacts on the economy and society caused by COVID-19.

He pointed out that this need for reduction will have a significant geopolitical impact, increasing the need for dialogue between countries and a change in primary energy sources.

Mr. Tolmasquim pointed out that Brazil has the advantage of having a renewable energy mix, with 50% of the total coming from renewable sources. For this reason, he said, Brazil can deepen trade partnerships with the United States, China, and the European Union.

In electricity, the level jumps to 91%, while the world average is 30%. In transportation, he stressed, 35% of the Brazilian matrix is renewable.

*Por Robson Rodrigues, Rafael Rosas — Nova York, Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Industrial growth remains challenging in Northeast Brazil, FGV says

FGV Ibre’s regional report shows region’s economy is outpacing national average growth, but industrial sector lags behind

09/18/2024

The Northeast region of Brazil is experiencing sustained economic growth, surpassing the national average in 2024, but its industrial sector still lacks dynamism and lags behind the country’s average performance. This assessment comes from Flávio Ataliba, coordinator of the Center for Northeast Development Studies at the Brazilian Institute of Economics of Fundação Getulio Vargas (FGV Ibre), who is also responsible for the Northeast Macro Regional Bulletin, released on Tuesday (17).

Mr. Ataliba states that the industrial sector’s issues in the Northeast are structural, and production levels have not yet returned to pre-pandemic figures. “The key takeaway is that the Northeast’s industry needs to become more dynamic. It still faces structural problems and is below the national level,” he said.

The newly released document compiles a series of economic data from the nine states in the Northeast, showing, based on the Central Bank’s IBC-Br index, that the region’s economy fell by 1% in June compared to the previous month, while Brazil as a whole saw a 1.4% increase. However, for the year to date, the Northeast’s economy has grown by 3.1%, compared to the national average of 2.1%. In contrast, the industrial sector’s performance is different, with the Northeast decreasing by 0.4% for the year, while Brazil as a whole increased by 2.6%.

Mr. Ataliba suggests a deeper analysis is needed to identify the main bottlenecks in the Northeast’s industrial sector. “Is it financing? Access to markets?”

The bulletin also cites data from the National Confederation of Industry (CNI) to highlight that industrial business confidence in the Northeast remains low. In July, it dropped by 2.2 points to 48.7 points. “According to the indicator, there is some resistance among entrepreneurs to invest and increase production in the short term,” the document notes.

In stark contrast, the performance of the services sector has been more positive. The Northeast Macro Regional Bulletin, using data from IBGE, shows that seven out of the nine states in the Northeast recorded an increase in the volume of services in June compared to May. Only Rio Grande do Norte and Alagoas saw a decline, the same two states that reported a decrease for the year to date.

The study also analyzed data from IBGE’s continuous PNAD survey and found that in the second quarter of 2024, the unemployment rate in the Northeast was 9.4%, a decrease of 1.7 percentage points from the first quarter of the year, which stood at 11.1%.

*Por Rafael Rosas — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Lower House speaker seeks consensus on Climate Authority

Arthur Lira advocates agreement with government to define leadership of new body

09/18/2024

Arthur Lira — Foto: Brenno Carvalho/Agência O Globo
Arthur Lira — Foto: Brenno Carvalho/Agência O Globo

Brazil’s Lower House Speaker Arthur Lira has indicated to his allies that the creation of the Climate Authority, announced by the government last week, will only move forward if its leader is chosen through a consensus between the Executive and Legislative branches. The continuation of the body would depend on the approval of the National Congress, which is responsible for passing or rejecting provisional presidential decrees.

During the transition period in 2022, the government attempted to establish the body, one of President Lula’s campaign promises, but backed down in the face of resistance from the Legislature.

In private conversations, Mr. Lira has argued that attempting to impose a leader could increase the likelihood of resistance in Congress, even though recent episodes of wildfires across the country have bolstered the case for the need for such a climate authority.

The rural caucus has already signaled that it may mobilize against the appointment if not consulted in advance. The group aims to prevent the body from falling under the Ministry of Environment, led by Marina Silva.

Congressman Pedro Lupion, the head of the caucus, said, “Marina and her team have already shown their ability to manage a crisis like this.” He added, “Their incompetence has been proven. Congress will have to approve [the Climate Authority] and, in the meantime, find the best government area and the best candidates.”

“The climate authority is not a single person but a committee that evaluates both prevention and correction measures. If it operates like in Rio Grande do Sul, appointing someone like Paulo Pimenta as the authority, it won’t work because it politicizes the debate without solving anything,” said Congressman Alceu Moreira, a member of the Agricultural Parliamentary Front (FPA).

Mr. Moreira believes that if Minister Marina Silva were chosen to also head the Climate Authority, her appointment would be rejected by Congress.

“The Climate Authority should be appointed by the National Congress and established as an institution with a clear mandate. It should be a state entity, not a government one. If it merely reflects the government’s ideology, it serves no purpose and only causes harm. It needs to be a technical expert,” emphasized the congressman from Rio Grande do Sul.

“I think it’s a positive initiative, as long as it’s not an ideological appointee. This position requires a nonpartisan approach and strong coordination within and outside the government. If not, we already have the Ministry of Environment. I support constructing a name with the three branches of government,” said Congressman Zé Vitor, a member of the rural caucus and the Lower House’s Environment Committee.

The opposition has already started criticizing the creation of the Climate Authority. Congresswoman Bia Kicis, in a video posted on social media, claimed the government “only thinks about creating public agencies and spending more money.” She questioned, “Isn’t Marina Silva the minister? Shouldn’t she be the Climate Authority?”

In an interview with Valor, Minister Marina Silva stated last week that she has been discussing for months with Mr. Lira the need for a comprehensive policy to combat extreme weather events, which would include a Climate Authority.

*Por Marcelo Ribeiro, Julia Lindner — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Federal investment rises in 2024, but remains inadequate

Analysts say the best performance since 2016 is still insufficient; fiscal constraints limit government spending in areas like infrastructure

09/18/2024

Margarida Gutierrez — Foto: Adriana Lorete/Divulgação
Margarida Gutierrez — Foto: Adriana Lorete/Divulgação

Federal government investments reached their highest level for the first seven months of 2024 since 2016. However, economists consulted by Valor warn that these investments are still insufficient to significantly boost economic growth or ensure adequate infrastructure for the country. This responsibility largely falls to the private sector given Brazil’s fiscal constraints. Despite the recent increase, federal investment remains below the average of developed countries and continues to lack transparency.

From January to July this year, federal investments totaled R$32 billion, the highest level for this period since 2016, when disbursements reached R$36.8 billion. These figures, obtained by Valor from the official records of the National Treasury Secretariat (STN), are adjusted to July 2024 prices and exclude financial investments. Compared to the same period last year, there was a 31.8% increase.

In the early 2010s, annual federal investments hovered around R$50 billion. However, the increasing need for fiscal adjustments—culminating in adopting the spending cap in 2016—and the difficulty in cutting mandatory expenses led to fiscal adjustments primarily targeting discretionary spending, such as investments. Brazil’s budget rigidity, with over 90% of mandatory expenses, also limits the amount the government can invest.

Consequently, there were years when federal investments were insufficient even to cover the depreciation of federal infrastructure—a situation that has improved with increased disbursements in recent years.

Following the approval of the so-called Transition Constitutional Amendment at the end of 2022 and the new fiscal framework for federal accounts last year, these disbursements have started to grow again. The framework sets a minimum of 0.6% of GDP for federal investments.

The Annual Budget Bill (PLOA) for 2025, presented at the end of August, mandates that investments must reach at least R$74.3 billion. For this year, the minimum is R$68.5 billion. These figures include disbursements from the New Growth Acceleration Program (PAC), launched by President Lula in 2023.

“Public investments remain very low,” said Manoel Pires, coordinator of the Center for Fiscal Policy and Public Budget at the Brazilian Institute of Economics at the Getulio Vargas Foundation (FGV Ibre).

He noted that last year these disbursements amounted to 0.5% of GDP. Including investments by state-owned companies, which often serve as an outlet for infrastructure spending in Brazil, the figure rises to 2% of GDP.

In contrast, average federal disbursements by OECD countries are around 3.5% to 4% of GDP—a difference that, accumulated over the years, results in a significant gap in capital stock between Brazil and developed countries.

“Brazil’s case is particularly severe because our infrastructure is very poor. Other countries don’t have as much need for investment,” said José Ronaldo de Souza Jr., chief economist and partner at consultancy Leme Consultores, and a professor at the Brazilian Institute of Capital Markets (IBMEC).

While the economists consulted by Valor advocate for most investments to come from the private sector, they also acknowledge that federal contributions are often necessary to make projects viable. Mr. Souza Jr. cited the highway BR-381 as an example. Auctioned in August by the federal government, the BR-381, known as the “Death Road” for its dangerous conditions, involves technically challenging construction. The auction stipulates that 31 kilometers out of a total of 296 kilometers will be turned into a freeway by the federal government itself.

Despite agreeing on the need to expand investments, analysts emphasize the importance of maintaining the current fiscal framework to avoid greater imbalances in the federal budget. Currently, the gross government debt (DBGG), considered by many economists as the primary indicator of federal indebtedness, stands at 78.5% of GDP, according to the Central Bank. This figure represents an increase of 6.8 percentage points since the beginning of President Lula’s third term.

Moreover, there is near-unanimity among public finance experts that the indicator will continue to rise in the coming years. The Independent Fiscal Institution (IFI), a Senate-affiliated fiscal policy watchdog, projects that the DBGG will reach 100.6% of GDP by 2034.

A third complicating factor is that Brazil’s starting point is higher than most emerging markets. According to the International Monetary Fund (IMF) in March, Brazil’s gross debt exceeds the average for emerging countries by more than 15 percentage points, trailing only Egypt, Ukraine, and China.

“Everyone is scrutinizing Brazil’s public debt closely,” said Margarida Gutierrez, a professor at the Federal University of Rio de Janeiro who likens the federal government to “constantly using an overdraft line of credit.”

Economists say the main way to create fiscal space for increased investments would be to change the rules for mandatory federal spending. Among the suggested options are unlinking social security and welfare benefits from minimum wage hikes, indexing the minimum wage only to inflation without real increases, and modifying constitutional spending floors for health and education, currently tied to revenue. From January to July, the total federal expenditure was R$1.325 trillion, but only R$32 billion was allocated to investment.

As reported by Valor in recent weeks, the economic team is discussing changes to the rules governing several sources of mandatory spending pressures, such as unemployment insurance, the Workers’ Severance Fund (FGTS), wage bonuses, the Simples Nacional a simplified tax regime for small businesses), and the FUNDEB (Fund for Maintenance and Development of Elementary Education). These suggestions are expected to be formally presented only after the municipal elections to be held in early October.

“A country with such high public expenses cannot have such low spending on investments that create positive externalities for the economy and well-being,” said Mr. Souza Jr.

“Every time Brazil sees a bit of growth, we start running out of ports, airports, sanitation, highways, railways,” added Mr. Gutierrez.

Another issue highlighted is the lack of transparency in federal investments. The investments reported monthly by the Treasury include parliamentary budget allocations, which have been a subject of discussion among the Executive, Legislative, and Judiciary branches due to their lack of transparency.

“In accounting terms, the expenses are recorded as investments, but many items end up under this category,” said Bruno Lavieri, chief economist and partner at intelligence.

*Por Estevão Taiar — Brasília

Source: Valor International

https://valorinternational.globo.com/
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