Brazilian government trims GDP growth forecasts

The Brazilian economy appears to be on a downward trajectory, which is beginning to affect investor sentiment regarding certain long-term assets.

This week, the finance ministry trimmed its forecasts for GDP growth for this year to 3.0% from 3.2% and to 2.2% from 2.3% for 2024.

"In 2023, the economy showed a better performance than estimated at the beginning of the year thanks to a record year for agricultural harvests," Luciano Rostagno, chief Latin America strategist at Banco Mizuho, told BNamericas.

"This positive effect is unlikely to be repeated next year. With services and the industrial sector in poor shape, key components of the economy, there are no factors to expect positive surprises that could generate upward reviews for next year's GDP," he added.

Brazil's GDP grew 2.9% last year and the expected 3.0% growth this year, albeit only slightly higher, could be an important political factor as it is the first year of President Luiz Inácio Lula da Silva's four-year term.

In anticipation of economic weakness in 2024, the government is trying to increase public investment to boost the economy, but warning signs are emerging about the side effects of this measure.

"Strategies in the past to increase public investment proved to be unsuccessful because they generated inflation in the medium term. Market agents understand this and add it to their risk models, demanding greater returns on the projects they assess. This is one of the factors that meant that some auctions planned by the government ended up not attracting interest from the private sector," said Rostagno.

The greater investor selectivity is already being felt.

The government suspended the auction for the concession of the BR-381/MG highway in Minas Gerais state due to lack of interest. The auction was scheduled for Friday and the deadline to submit offers ended on Tuesday without any being submitted. The contract required the new concessionaire to invest around 10bn reais (US$2bn) over 30 years.

In addition, geological survey department SGB has suspended auctions for gold, diamond, phosphate, gypsum, limestone and kaolin exploration areas that were scheduled to take place later this week. The SGB said the decision was made to provide more time for interested companies to prepare themselves technically to participate in the event.

INFLATION, INTEREST RATE 

The finance ministry lowered its estimate for the official inflation index (IPCA) for this year to 4.66% from 4.85%, but it upped its forecast for 2024 to 3.55% from 3.40%. 

The central bank is following a monetary easing cycle now that inflation is slowing, and the country's Selic base rate it currently at 12.25% and is expected to cut in the coming quarters.