Brazilian Investors should find comfort in Lula 2.0

As much as things change, things remain the same. And so, after being out of office for over a decade, and spending time in jail on corruption charges, Luiz Inacio Lula Da Silva will return as Brazil’s president. We would usually be concerned about the return of a leftist president, one that wants the government and SOEs to play a greater role in the economy. But this time there are checks in place that should keep Lula’s policies more centrist. First, although Bolsonaro lost the election, Bolsonaroism was a clear winner, with the right/center right keeping control of both the House and the Senate. This will make it very difficult for Lula to push through a leftist agenda, and importantly, keep him from removing the fiscal spending cap and running up large deficits. The other is government debt/GDP. When Lula was in office in the 2000’s, Brazil’s government debt/GDP was a reasonable 50-55%; it is now at 77%. Within Emerging Markets, this puts Brazil in the company of Egypt, Pakistan, Argentina and Sri Lanka. This is not a club you want to be a part of. The elevated debt level should also keep the Lula administration from increasing spending. So, there are checks and balances in place, which gives us more comfort on Lula 2.0.