Five doubts answered on Brazil’s economy in 2023

Will inflation return to the target? Will Brazil have a recession? Will interest rates keep rising?

Here are some answers to these and other questions.

After a year with positive economic performance – at least in relation to its emerging peers – Brazil starts 2023 with several challenges in this area.

Some examples are economic slowdown, restrictive interest rates, inflation, and fiscal balance.

In a report, the Bank of America (BofA) states that even the potential gains from a reopening of China still depend on the fiscal definitions that the new government will define in the coming months.

“The new government will have to juggle demands for higher spending, no expectation of privatizations, and focus on defining a new fiscal rule, coupled with the eventual approval of a long-awaited tax reform,” says BofA’s report.

On one side, the bank sees the possibility of a slowdown in imported goods and service inflation.

However, on the other end, the report states that the resumption of fuel taxes and the expectation of an increase in inflation itself may hinder this deceleration.

Here are five answers from BofA about the main doubts regarding Brazil’s economy in 2023:

1. WILL THE FISCAL CONUNDRUM CONTINUE IN 2023?

Answer: Yes.

“Fiscal has been a cause for concern and focus in Brazil in recent years,” the report says.

After two years of positive results, with primary surpluses and a reduction in the government’s gross debt, North American bank analysts see the public accounts deteriorating this year.

According to them, the number improvement was “largely sustained” by non-recurring revenues (mainly those related to oil, such as dividends from Petrobras and royalties).

Meanwhile, fiscal stimulus measures were not particularly low and amounted to more than R$500 billion, adding 2021 and 2022.

“Some of these stimulus measures are expected to continue ahead.”

Analysts point out that the adjustment measures presented by Finance Minister Fernando Haddad focus on one-off revenues, with few gains coming from cost-cutting and no long-term measures.

The expectation is for tax reform.

2. WILL INFLATION RETURN TO THE TARGET IN 2023?

Answer: Unlikely

“Overall, inflation in 2022 surprised analysts downward from expectations at the beginning of the year. However, administered prices [fuel and energy taxes] were solely responsible for the annual slowdown,” BofA analysts say.

According to them, risks are tilted to the upside this year, and convergence should be expected from 2024 on.

Service and food inflation is expected to decelerate (helped by broadly stable commodity prices), while administered prices should rise again, driven mainly by rising energy tariffs.

“Concerning 2023, we project inflation at 4.8% by the end of the year, lower than in 2022, almost at the target ceiling (of 4.75%).”

3. WILL BRAZIL FACE A RECESSION?

Answer: No

The American bank expects the GDP (Gross Domestic Product) growth to slow but still register an advance: +0.9% (from 3.25% growth expected in 2022).

“Private consumption may be challenged by a tightening credit environment, with high-interest rates and spreads, among already highly indebted households,” the report says.

Analysts expect credit conditions to improve in the year’s second half as the Central Bank begins the interest rate-cutting cycle.

“However, a real increase in the minimum wage and public employees’ salaries will happen and has the potential to boost private consumption,” they add.

4. WILL THE SELIC RATE FALL IN 2023?

Answer: Yes

However, analysts say the cut may be smaller than previously expected.

“The deterioration of the fiscal scenario, translating into higher demand and de-anchoring of inflation expectations, has made anticipated Selic rate cuts increasingly unlikely.”

With this, BofA expects a delay in rate cuts, resulting in a Selic of 11.75% at the end of 2023, down from the 10.50% expected.

“We expect a sequence of 50 basis point cuts per meeting only from August 2023, as we expect inflation to bottom out early in the year’s second half.”

5. WILL THE REAL APPRECIATE?

Answer: Very likely

“While policy concerns remain latent, high domestic interest rates combined with expectations of China’s reopening could benefit the real,” analysts say.

They expect the dollar to end the year valued at R$5.20 versus R$5.28 at the end of 2022.

“If the government delivers a reliable new fiscal rule and a good tax reform proposal in the first half, the real could again outperform this year,” the report says.

By 2022, the currency outperformed most other countries’ currencies in spot return and total return.

With information from Forbes

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