In brief

The president, Luiz Inácio Lula da Silva of the leftist Partido dos Trabalhadores, scored some important victories in his first year in office: Congress approved a new, more flexible fiscal framework that allows real spending to rise by up to 70% of revenue growth, as well as a long-awaited tax simplification reform that consolidates several taxes into a dual value-added tax (VAT) system. The legislative agenda for 2024 will focus on passing complementary laws detailing sectoral exemptions and other items that will dictate the overall level of VAT, which is likely to be the highest rate in the OECD, at more than 27%. By mid-year, however, the October local elections will be hanging over politics, delaying progress on the legislative agenda until 2025. Although we believe that the government's broader medium-term fiscal targets are overly optimistic, the framework appears credible enough for now to bolster investor confidence in debt sustainability. 

After slowing in late 2023 owing to the legacy of high interest rates, economic activity will gain traction as inflation eases and the central bank continues to loosen monetary policy; it has already cut the Selic rate by 250 basis points since its easing cycle began in August last year. Our forecast for GDP growth of about 2% per year in 2024-28 is based on the implications of Lula's statist economic policies for the business environment and limited structural reforms.

Read more: Brazil's new industrial policy is not so new

Read more: October 2024 local elections: a dress rehearsal for 2026?

Read more: Are the authorities any closer to arresting Bolsonaro?