Weekly Report - 02 March 2023 (WR-23-09)

BRAZIL: Business re-assessing Fernando Haddad?

At the worst point last week, it looked as if Haddad was coming under fire simultaneously from business and from within the so-called ‘political wing’ of the Lula administration. He is seen as relatively isolated within the ministerial team. He has the backing of the environment minister, Marina Silva, who opposes fossil fuel subsidies, but otherwise he is in a minority.

The PT party president, Gleisi Hoffmann, tweeted that the tax waiver should be further extended to April, when its future might be considered alongside decisions on energy prices charged by the state oil company Petrobras. This came as another key figure, the president of the national development bank (Bndes), Aloízio Mercadante, made an unsubtle bid for Haddad’s job.

Mercadante has been organising a high-level seminar on the fiscal responsibility framework - an issue which is a core part not of his, but of the finance minister’s job. According to media reports and rumours the political wing around Hoffmann and Mercadante wanted to keep on subsidising petrol and ethanol prices to counter the first signs that the new government’s popularity is beginning to wane, a process which they said would accelerate if petrol prices jumped back up from the beginning of March.

Inflation in the month to mid-February was higher than expected (0.76%, up from 0.55% in the month to mid-January). An increase in inflation is a source of worry for the economic team. The annual rate now stands at 5.63%. This suggests that the autonomous central bank could be reluctant to lower its benchmark interest rate high, at 13.75%. Earlier in February, Lula repeatedly criticised the central bank president, Roberto Campos Neto, over high interest rates, arguing that they could choke off economic recovery in 2023 [WR-23-06].  There is already an economic slowdown underway, with GDP expected to expand by less than 1% this year.   

This week, however, the tide appeared to be turning back in Haddad’s favour, at least in the short term. He announced that the tax waiver would indeed end on 1 March, saving the government R$28.8bn (US$5.76bn), an amount equivalent to 1.5% of GDP. This has reassured the financial markets. He also said the new tax would be rebalanced to fall more heavily on petrol, a fossil fuel, than on ethanol, a renewable. This won the vocal support of Silva. A further significant detail is that Petrobras domestic prices, currently above international ones, are being reduced to soften the overall impact on consumers and inflation.

In another related decision, Haddad and the energy and mines minister, Alexandre Silveira, have together announced a form of windfall tax, at 9.2%, which will be levied on crude oil exports for the next four months. This is expected to bring in revenues of around US$1.26bn to help reduce the fiscal deficit.

The debate on Petrobras and other oil companies paying a windfall tax has been brought into sharper focus by the announcement of record profits by the state-owned company. On 1 March it reported a 38% year-on-year surge in fourth quarter earnings to R$43.34bn (US$8.37bn). Profits last year reached R$188.3bn (US$36.3bn), the highest in the company’s history. Record earnings last year - the result of strong production and high international energy prices caused by the war in Ukraine - have been used to increase dividend payments.

Finally, Haddad said the end of the waiver should open space for the central bank to consider cutting interest rates, although it is likely to want to see firm evidence of inflation falling. Haddad described how the package took shape by saying “President Lula found a very adequate middle ground so that the weight of the decision would fall on several actors, including exporters and Petrobras.” Although there will be more battles ahead, politically, business leaders and financial markets may begin to see Haddad more as an ally than as an enemy.

There was other good news for Haddad. On 27 February the central government reported a better than expected primary budget surplus for January, the new government’s first month in office. The surplus was well above expectations at R$78.3bn (US$15bn). It was helped by higher taxes on capital income. The outlook, however, is still for a primary deficit in calendar 2023, after congress approved a big spending package allowing the government to fund social programmes and honour its electoral promises.

The centrão block of conservative parties, the Progressistas (PP), the Republicanos, and part of Bolsonaro’s Partido Liberal (PL), however, could still pose difficulties over the oil export tax, in particular. At the end of the four-month period for which it has been instated, they may not support it when it comes up for a renewal vote.

Centrão demands concessions


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