Brazil to tighten spending in anticipation of US election result

Brazilian officials plan to curb public spending in an attempt to partially mitigate capital market volatility generated by the November 5 presidential election in the US.

Assets in Brazil have faced turbulence, as the local currency depreciated and company shares on the stock exchange lost value amid uncertainties related to the election.

The race between Donald Trump and Kamala Harris is seen as too close to call, and if Trump wins and makes good on his promise to boost protectionism, multiple countries could face pressure, with impacts on global trade and capital flows.

The Brazilian government has been criticized for not reducing spending to contain the fiscal deterioration of public accounts, but the challenge has become more urgent with the US elections, and officials want to send clearer signals to assure investors.

President Luiz Inácio Lula da Silva has requested finance minister Fernando Haddad to cancel his trip to Europe planned for this week in order to work out spending reduction measures, a government spokesperson told BNamericas. 

High-ranking government members recognize that the election results could cause short-term turbulence.

"All uncertainty scares away capital, and it is obvious that the moment of uncertainty we are living in now generates a bit of this capital outflow. But Brazil is today the second country in the world that receives the most foreign direct investment and even if the world shakes a little after the election in the US, this scenario tends to continue because all countries in some way also suffered from the impacts of the election," transport minister Renan Filho told BNamericas.

According to OECD figures, the US was the leading global FDI recipient in the first half of this year, followed by Brazil and Mexico. Brazil saw FDI inflow of US$32bn, down from US$33bn in the same period last year.

"I believe that the package that minister Haddad will soon launch in relation to the fiscal framework goals will provide more internal certainty. With this, we are able to mitigate volatility more easily," added Filho.

Although the Lula administration signaled a preference for Harris, who serves as vice president, Brazil’s relationship with the White House has not been close in the last two years.

“Regardless of the results of the elections in the US, if we have fiscal stability, regulatory stability, we will bring investments. Lula previously governed Brazil with the US having presidents from the Republican Party and the Democratic Party, so the important thing is that we do our homework and guarantee stability, which is what the Lula government is doing,” Maurício Muniz Barretto de Carvalho, special secretary of federal growth program PAC, told BNamericas.

Lula was president between 2003 and 2010, dealing extensively with George W. Bush and Barack Obama.