Brazil’s new economic team has been trying to show investors they’re serious about fiscal responsibility. That’s not been an easy task amid a cacophony of official pronouncements.

On the second Sunday of this year, a bunch of bankers were at a weekend seminar when the news broke. Hordes of protesters were storming the Brazilian presidential palace, Congress and the Supreme court in Brasília. The militants refused to accept Luiz Inácio Lula da Silva’s electoral victory and inauguration as the country’s new president, saying that it had been stolen from his rightwing predecessor, President Jair Bolsonaro.

Like millions of Brazilians around the country, the bankers watched the scenes on television in astonishment.

“We were soon overwhelmed with questions from clients. It was déjà vu after what happened in the US on January 6, 2021,” says a bank executive.

The government denounced a coup attempt. Yet, unlike the prolonged instability in Peru and to a much lesser extent in Chile, Brazilian authorities managed to restore order in a matter of hours.

“It was quite ugly, yet it did not affect investors’ mood, not for long,” the banker says.

Luiz Fernando Figueiredo, chairman of Jive Investments, an investment firm in São Paulo, agrees: “It was a very unpleasant event. Yet democracy has never been at risk, and none of the institutions defended the rioters.”


On the economic policy front, the Lula administration has set out to clearly make its priorities known without being distracted by the incident in the capital. Indeed, Lula’s finance minister, Fernando Haddad, announced soon after the riots a preliminary package to fund social programs during the first year of government. He is now at work on a new fiscal framework to replace a rule for capping public spending. The next step will be a much-expected tax reform.

While it is feared that the initiatives could bring fiscal expansion, investors have not been totally put off by them.

The far greater concern for investors has been a noisy crusade by government and party officials against the central bank’s monetary policy and its governor, Roberto Campos Neto. The governor has raised the benchmark interest rate from 2% to 13.75% in a year and a half to fight inflation. The rate has been at 13.75% – the highest since 2016 high – since August 2022 even though the inflation rate has fallen to 5.8% in January from a most recent peak of 12.1% in April 2022.

Photo: Fernando Haddad

“This country cannot be held hostage by a single man,” Lula said angrily in a recent radio interview. “This guy was not elected for anything … You’ve got to think about how to cut interest rates so that the country gets credit again, so that the country gets back on its feet.”

Lula’s comments came after official statistics showed that the Brazilian contracted by 0.2% in the fourth quarter of 2022 from the previous quarter, what is widely expected to be the start of a prolonged slowdown.

That wasn’t the first swipe against the central bank governor. The president had previously questioned the independence of the central bank and inflation targets.

Some analysts reckon that Campos Neto has become a scapegoat for Lula and his leftwing Workers’ Party. But the harsh rhetoric is also a sign that the polarization that prevailed during the 2019-2022 Bolsonaro government has not disappeared, reckons Monica de Bolle, senior fellow at the Peterson Institute for International Economics in Washington, DC.

“People have been contaminated by ideology. They have become a lot sillier during the past four years. It should not be this way,” she says.

Most investors agree. Confrontation is counterproductive and may indeed delay the loosening of monetary policy, they say.

“Inflation has been falling thanks to high interest rates, and the central bank was actually getting ready to cut them in the second quarter. But the noisy controversy has created uncertainty,” says Figueiredo, who was a director of the central bank from 1999 to 2003.

The noisy controversy has created uncertainty.

Luiz Fernando Figueiredo

Matheus Pizzani, an economist at the brokerage house CM Capital in São Paulo, thinks much the same. “Interest rates are now bound to remain high for some time,” he says, adding that his forecast is that the policy rate will end the year at 12.25%.


Haddad has been walking a tightrope. While echoing Lula’ complaints against Campos Neto, he has used more diplomatic terms to invite the central bank to loosen monetary policy.

“The country is united behind this cause, which is interest rate cuts,” he said at a press conference in early March after announcing measures to curb the fiscal deficit by BRL29 billion ($5.6 billion). Fuel taxes that had been lifted by Bolsonaro during the electoral campaign were reintroduced. In addition, the government created a 9% export tax on crude oil that took investors by surprise, although he says the tax may only be imposed for four months.

“Haddad appears to be quite a reasonable figure and very much in favor of fiscal stability. His first package was fine, and preliminary signs point towards a very responsible fiscal framework. This has led to a more positive atmosphere,” says Figueiredo.

Nevertheless, financial markets continue to react negatively whenever Lula continues to criticize the independence of the central bank and inflation targets in very harsh terms. Ibovespa, the benchmark stock index in Brazil, fell 1.6% through March 6 this year in volatile trading.


The initial goodwill toward the government has started to fade after more than three months in office and just when Haddad faces his biggest challenge yet. Haddad must convince Congress to pass a tax reform after so many of his predecessors failed to do so. The bill is expected to be presented in April.

To boost his chances for success, Haddad appointed Bernard Appy as his special secretary for tax reform. Appy’s main ideas are to create a national value-added tax and tax consumers rather than producers. The government also wants to include elements of social justice in the reform, such as a tax on dividends (Brazil is one of the few countries in the world that does not tax them.)

A former consultant, Appy is well known among lawmakers and investors, given that he has already presented one of the two tax bills currently in Congress.

“Bernard Appy’s appointment to this position has been viewed positively. This is a very strong indication because he is the author of the main draft that has already been in Congress since 2019,” says Leonardo Porto, the chief economist at Citibank in São Paulo. “The planned simplification of the tax system is much needed and will be welcome.”

In spite of the controversies that are all too common in Brazil’s economic history, Haddad and his team are likely to enjoy market support as long as they embrace pragmatism.

“The current situation is a bit confusing, but we think that things will settle down and will start to improve little by little,” says Carolina Rocha, COO of Perfin, a Brazilian asset management firm. “This may pave the way to more stability.” LF