Brazil woos skeptical foreign investors with new fiscal plan

Brazil's business and political leaders are on the road, pressing the case for investment in the Latin American oil producer as they seek to quell concerns over leftist President Luiz Inacio Lula da Silva's high-priced spending wish list.

Rebounding commodity prices and a hawkish, independent central bank made Brazil an emerging market investor darling last year. But its economy, flattened like other emerging market oil producers by the COVID-19 pandemic, has only limped out of recession. The International Monetary Fund predicts tepid 0.9%economic growth this year.

At the Lide Brazil investment conference in London on Friday, investors and political leaders said the fiscal framework that President Lula sent to the congress last week quelled concerns that his ambitious social spending goals would balloon the deficit, and boosted its appeal to investors.

"This is a positive mood," Joel Virgen Rojano director of Latin America strategy at TD Securities told Reuters. "There are clear anchors, clear rules."

The long-awaited framework would allow expenses to grow up to 70% of the increase observed in recurring revenues, aiming to keep public debt sustainable.

Senate President Rodrigo Pacheco told the conference, the Lide group's first in-person international event since the pandemic, that legislators would move swiftly to approve the bill, which also seeks to curb a tendency for increased spending fueled by uncertain extraordinary gains.

"We will be very quick to approve the essence of the bill, even if we will have a few changes," Pacheco said, adding lawmakers needed to quickly pivot to tax reforms that are core to the government's revenue targets.

Brazil's markets have been mixed since Lula's return to power on Jan. 1, against a backdrop of a six-year high in interest rates and worries over the feasibility of ambitious government revenue growth targets.

The real hit a 10-month high this month and hard-currency bonds offered a nearly 4% return in the first quarter. A $2.25 billion US dollar bond offering – its first in a year and a half – was oversubscribed.

But stocks are in the red in dollar-terms (. MIBR00000PUS) in 2023 compared to small gains in wider emerging markets (. MSCIEF) and a more than 20% rise in Mexico's equities (. MIMX00000PUS).

Stocks did rally after Lula submitted the fiscal bill.

Wall Street bank JPMorgan confirmed it is overweight on Brazil stocks last week, citing hopes that a potential soon-to-come interest rate cut would fire up equities.

The new framework will ease some deficit concerns.

"Some of the tail risks of something completely unorthodox were taken away," said Jared Lou, portfolio manager at William Blair Investment Management. "We didn't see very extreme policies being promoted. So that has led to some compression in credit spreads."

The view that the US interest rates are close to peaking, which could soften the dollar and strengthen other currencies, is piquing interest in emerging markets and could also lift Brazil.

Yet for many, the waters aren't clear yet.

"It feels to me like there are a lot of things that can go wrong," said William Jackson, chief emerging markets economist with Capital Economics. "This fiscal rule only works if the government can raise revenues quite significantly."

Ronaldo Patah, chief investment officer Brazil at UBS Wealth Management, said that despite uncertainties, Lula's fiscal reform suggested he had shifted his focus to the future -- and away from unravelling previous reforms.

"This is a better environment," he said. "Foreign investors have goodwill for Brazil - they want to invest."

 

Reuters