Latin America

Executive Summary

  • On November 27, Brazil’s Finance Minister Fernando Haddad announced a package of spending cut measures and the outline of an income tax reform.  The package was a reaction to market unease over the perceived weakness of the country’s fiscal framework, which built up over the past year.
  • The announced spending cuts were poorly received by market players prompting the Brazilian real to reach a record devaluation against the U.S. dollar.  They perceived the announcements as lacking spending cut ambition and including future spending through income tax exemption.  There is also uncertain congressional support and no fixed timeframe for the approval of these measures.
  • Investors might reap short-term gains from the heated economy and low-priced assets in Brazil, but a fiscal framework in peril points to medium-term problems, including high inflation and reduced economic growth.

Analysis

On November 27 and after two months of internal government discussions, Brazil’s Finance Minister Fernando Haddad announced a package of spending cuts in an effort to rescue the country’s fiscal framework.  In addition, Haddad announced President Luiz Inácio Lula da Silva’s administration proposal for an income tax reform.

The following day, Haddad and five other ministers provided details on these measures.  The package was not well-received by market players, with the Brazilian real reaching a record devaluation against the U.S. dollar.

Brazil’s fiscal framework, proposed by the Lula administration in March 2023 and approved by Congress in August 2023, has been progressively weakened due to the Brazilian federal government’s lax fiscal policy and refusal to address structural spending issues.Continue Reading Brazil’s Fiscal Framework in Peril: Impact on Businesses

Executive Summary

  • Nation-wide elections for mayors and city councilors will likely impact Brazil’s national politics, its federal government, and the upcoming elections for the Speaker of the House and President of the Senate – all of them relevant for investors.
  • The local elections will be seen as a referendum on President Luiz Inácio Lula da Silva’s policies, as well as a test of the opposition’s strength, including former President Jair Bolsonaro’s current political standing.
  • The outcome of these elections might impact the Lula administration’s policy trajectory, the strength of the pro-business majority in Brazil’s National Congress, and the functioning of federal regulatory agencies in 11 key economic sectors.

Analysis

On October 6, Brazil will hold its nation-wide elections for mayors and city councilors.  All 5,569 Brazilian cities will elect the head of the local executive branch, as well as all city council members for a four-year term.

While this electoral cycle focuses on local issues, and mayors and city councilors have a limited policy impact on businesses, the local elections will likely have a significant impact on national politics, the federal government, and the upcoming elections for the Speaker of the House of Deputies and the President of the Federal Senate – all of them relevant to investors.

Impact on federal government

Election watchers will be looking at the performance of the main political groups based on three indicators: the total number of mayors and city councilors they elect; wins in the 27 state capitals; and wins in the so-called “G103”, the 103 cities with a population of more than 200,000.

If the election results in a larger number of mayors and city councilors formally supported by President Luiz Inácio Lula da Silva, this will likely be seen as voters’ endorsement of his policies.  While voters might not focus on specific policies – including, among other aspects, a lax fiscal policy, increased taxation, and state capitalism-type measures – individual perceptions on cost of living and economic prosperity tend to play a role in voting decisions.  In this scenario, the Lula administration will likely continue its current policy trajectory.  However, if the total number of mayors and city councilors supported by the president is equal to or lower than the existing number, the result will probably be seen as a rebuke of the Lula administration and might result in pressure to change current policies.Continue Reading Impact of Brazil’s Local Elections on Businesses

  • Mexico’s new political configuration gives current president Andrés Manuel López Obrador, president-elect Claudia Sheinbaum, and their party (Morena) ample margin to advance legislation (including constitutional reforms) starting in September when the new Congress is in place.
  • Sheinbaum will take office in October, leaving López Obrador a one-month window to use Morena’s new margin in Congress to implement policies he was previously unable to enact, including important constitutional reforms, such as a full overhaul of the Judiciary.
  • So far, Sheinbaum has voiced broad support for her predecessor’s policies. Markets (the dollar-peso exchange rate and interest rates) have thus far reacted negatively, reflecting a perception of increased political and regulatory risk, as well as a potential deterioration of the overall business environment.
  • Companies with business interests in Mexico, including those seeking to nearshore operations in response to U.S. trade measures, should closely monitor political developments in the country, and assess if their investments are adequately protected by an effective investment treaty.

The recent election resulted in an unambiguous win for president López Obrador and his Morena party. As his designated successor, Scheinbaum received 60 percent of the vote, allowing her to become Mexico’s first woman head of state. In addition, Morena also secured seven of the nine contested governorships, a qualified (two thirds) majority in the Chamber of Deputies (365/500 seats), and is just two seats shy of holding a majority in the Senate (83/128 seats). Morena also will hold a majority in 27 of the 32 state legislatures.Continue Reading Mexico’s Election Business Environment Implications

The Government of Brazil has initiated a public consultation offering companies, business associations or civil society organizations an opportunity to comment on the country’s proposed new foreign trade strategy.

The consultation was initiated by the Foreign Trade Board (CAMEX), Brazil’s federal government interagency mechanism to coordinate the country’s trade policy. 

Continue Reading Brazilian Government Opens Consultation on New Foreign Trade Strategy

As early as this week, the Federal Senate of the Brazilian National Congress may vote a potentially historic tax reform, revamping a tax system that has been in place since the 1960s and has increased in complexity, inefficiency, and compliance cost over the years.

The reform is a draft constitutional amendment (PEC) that requires a favorable vote by at least three-fifths of the members of each chamber of Congress in two rounds of voting (308 in the House of Deputies and 49 in the Senate).

The House approved the amendment on July 7, 2023, with 382 and 370 votes in the first and second rounds, respectively.  The Senate must now vote on the amendment.

Pressure Politics in the Senate

The reform is largely focused on consumption taxes, creating a full-fledged value-added tax (VAT) for Brazil, although it also includes changes in property taxes.  Its outline, political economy, and approval process was discussed in this blog post.

The Senate rapporteur’s report includes key changes to the House-approved draft text.

The Senate is under pressure to establish a tax ceiling for the VAT.  President Luiz Inácio Lula da Silva’s administration is pursuing a strategy to increase government revenue in order to achieve the country’s ambitious new fiscal framework goals.  Private sector groups are concerned the administration might push for a VAT rate higher than the existing tax level, increasing the burden on companies.  They are also concerned about the scope of the proposed Selective Tax on goods and services with negative health and environmental externalities.  The opposition in Congress in echoing these fears.Continue Reading Key Vote on Tax Reform Expected in Brazil’s Senate