What happens in Brazil?

Lula is preparing a new government that will not have a honeymoon. The combo he receives is complicated: strong demands from an irritated society to meet with very few available resources.

Lula won in the second round by the smallest margin in the history of Brazil because he had a wide advantage in the popular sectors. He is going to find himself with a society in which the growth of the middle class and hope stopped a while ago. In addition, he receives a fat and inefficient state apparatus.

This determines that the new government faces three major challenges.

In the first place, the government must obtain resources to be able to carry out campaign promises, in a legal framework in which the increase in spending above inflation is capped by the Constitution. It will not be easy to generate fiscal space without unanchoring the expectations of a market that looks sideways.

Secondly, Lula has to demilitarize the government and at the same time give prestige to the Armed Forces again. Something always very complex.

Third, a parliamentary majority must be formed to govern. It is true that there is room for negotiation in parliament, but agreeing is not free. Lula needs to form a government that is comfortable, but that does not lose credibility. He has to live with a broad electoral front – united to prevent Bolsonaro’s re-election – but with few similarities. In the transition, more than 30 thematic groups work with more than 300 people with very different points of view. Lula will have to permanently arbitrate between opposing visions that coexist in his electoral support base.

The economy is key and there are great uncertainties about the position of the new government on several fronts. For example, it is not clear what will happen with international insertion, with the tax regime, with the role of public companies, with trade policy or with investment promotion.

There could be a promising path to move forward despite the restrictions. If Brazil sets out to be an environmental leader, it can move forward with organic food production and renewable energy. The external demand exists, as well as the potential supply in Brazil. It would be a great opportunity to attract investors and create jobs.

From our point of view, the first thing that Uruguay needs is for Brazil to grow. It is today our main buyer of goods and much more can be sold to it even with the new approved regulations that allow entering Brazil without paying tariffs from free zones.

The position that Brazil takes on the “flexibility” of Mercosur will also be important. Stopping the opening drive would be a setback for Uruguay. Even more so when there are expectations of being able to enter into the Trans-Pacific Agreement (CP-TPP), which would be very beneficial for the country. There are no certainties about the position of the Lula government in this regard. What we do know is that Brazil’s development depends to a large extent on achieving a better international insertion. The first thing would be to confirm the Mercosur-European Union agreement and pass the ball over to Europe for its ratification.

You have to be attentive these days to see how the government that starts on January 1 is formed. What happens in Brazil is always very relevant to Uruguay.

What happens in Brazil?