Brazil – Trip Notes

We met with political analysts, local economists, and a meeting with the VP candidate from the center-right coalition Geraldo Alckmin. Former president Lula and former Sao-Paulo governor Alckmin are leading in the polls for the October presidential election. Perhaps what is more worrisome is that potential GDP growth (i.e.: growth without inflation pressures), could decrease in the absence of pro-market structural reforms. The Brazilian economy grew, on average, just over 2.0% YoY in the past 20 years. Perhaps, the most interesting finding of our trip was that former governor Alckmin believes the most pressing problem in Brazil is the lack of growth even above poverty and inequality. While he did not provide details on how to tackle the lack of growth, he mentioned that a “bold agenda of competitiveness” was needed. He did mention that a complete revamp of the tax system was needed to remove the known problems of it being excessively complicated, causing litigation, and regressive. Alckmin dismissed excessive fiscal spending as a solution to grow the economy. In words of Alckmin, excessive fiscal spending would only cause inflation. Locals fear that under Lula congress will move to pass a series of reforms, for instance undoing parts of the 2017 labor reform that decreased labor rigidities and lowered the power of unions, as a part of an agenda that would not allow potential GDP growth to increase. Fears that Lula would increase the balance sheet of state-owned banks (for example the BNDES) therefore re-surging parafiscal fiscal risks and that he would mess around with the pricing policy of Petrobras, also rank high as key concerns of the locals.