Economic uncertainty reigns in Brazil despite positive 2023

Doubts about Brazil’s economic performance are leading companies to put key decisions on hold, although the economy may still surprise positively.

Growth should reach 2.89% this year and 1.50% in 2024, according to the most recent weekly central bank survey among economists.  

This year’s growth will be carried by the agricultural sector and its record harvests, but beyond these figures challenges appear, as companies grapple with costs of debt because of the high benchmark interest rate.

"The scenario today points to great uncertainty for businesspeople over the next 6 to 12 months. If, on the one hand, there is an indication of a reduction in the Selic rate in the coming months, we do not know exactly what the rate of economic growth will be," Douglas Bassi, director of financial advisory Virtus BR Partners, specialized in M&As and debt restructuring, told BNamericas. 

“Companies that were somehow certain that they had to restructure their debt are waiting to see what happens,” added Bassi. 

The central bank started a Selic reduction cycle in August, cutting the rate by 100 basis points to 12.75% since then. But the rate remains high to confront unrelenting inflation.

Meanwhile, the rate of non-performing loans (NPLs) reached 4.9% in August, the most recent figure available, while the NPL rate of companies increased to 3.3% from 3.2%. 

The Selic is expected to fall to 11.75% by year-end and 9.25% next year, as the reduction pace will slow down, according to the central bank survey.

“Recent signals from the Brazilian government point to weak fiscal performance and this is putting pressure on the future interest rate curve. If we look at the futures market now, investors are not believing that we will reach a single-digit interest rate next year,” Carlos Daltozo, head of equity analysis and banking analyst at Eleven Financial Research, told BNamericas.

Expectations regarding the reduction cycle have deteriorated after President Luiz Inácio Lula da Silva said it was unlikely that Brazil achieved a fiscal balance in 2024. 

Finance minister Fernando Haddad has tried to convince market participants for months that the government will achieve the balance and remains committed to fiscal discipline. Investors are observing fiscal decisions because of Brazil’s high debt and because previous Workers’ Party administrations oversaw rises in public spending.

But some economists also claim that the economy could surprise positively next year, just as it did this year, driven by consumption-boosting social programs and improving consumer sentiment amid interest rate reductions.

CENTRAL BANK 

The next Selic decision is expected for Wednesday. Lula has criticized the monetary authority’s head, Roberto Campos Neto, personally in previous attempts to create pressure and speed up the reduction cycle. 

The bank became independent in 2021, with board members serving fixed terms. Gabriel Galípolo and Ailton Aquino are the only members that were appointed by the current administration. The other six and Campos Neto assumed their posts during the previous Jair Bolsonaro administration.

Earlier this week, the government appointed business professor Paulo Picchetti and former public servant Rodrigo Alves Teixeira to replace Fernanda Guardado and Mauricio Moura, whose board terms end December 31.

More terms expire next year, paving the way for the Lula administration to achieve board dominance.