Open Zeitgeist: Brazil Macro & Fiscal: Should you be worried?
A piece by Alex Ball, founder & CEO of VNCFX, foreign exchange firm with R$4Bn+ transacted for the biggest unicorns in Brazil
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Introducing today's author: Alex Ball
I met Alex almost 5 years ago now. I used to run a digital marketing agency and Alex was a client with VNCFX, a private client FX advisor for businesses and individuals.
He's already done exchange transactions up to R$4Bn in the last 5 years for major Brazilian unicorns, and many other Brazilian and Latam companies that received international funding.
The relationship we had as supplier and client at the agency didn't last long. Honestly, I couldn't hack it with the agency, and at the time, I was fed up with being a solo founder. I wanted to build a company, in the company of other people.
But our friendship stuck. Of course, it was because we went to eat a feijoada during our first lunch together and because - some witnesses claim - we drank a caipirinha or two.
Since then Alex and I have been friends with similar points of view on investment strategies, and macroeconomy but strongly disagree with each other on whether São Paulo Futebol Clube should've won against Liverpool that day in 2005.
Alex is an English expat living in Brazil for the past 20 years and I'm lucky to have met him and learned from him about subjects such as life, work, and how money works. In turn, I taught him a thing or two about Bitcoin and how he should buy more of the thing.
With Open Zeitgesit we want to bring other people's perspectives on the Brazilian economy. We want to bring renowned and experienced professionals who open a channel for discussions otherwise connected to one side or the other of the political spectrum.
Alex accepted coming in for this Open Zeitgeist's edition to elaborate on his point of view about Macro & Fiscal in Brazil. Here's what he has to say about how Brazil's doing and what we can expect from our economy:
Should you be worried?
For anyone that is paying attention, last week’s Brazilian Monetary Policy Committee meeting has given us a glimpse of what may be coming in 2025. If you do live and work in Brazil and you follow the local exchange rate, then it's worth keeping an eye on the central bank monetary policy meetings for the remainder of 2024.
The committee voted 5 to 4 in favour of a 0,25% rate cut, nothing astonishing about that. The four members that voted against wanted a 0.5% cut and are all directors that have been nominated by President Lula, and therein lies the concern moving forward. It is no secret that the current President wants to pursue an expansionary fiscal policy to ramp up spending.
Parallels with the ghosts of the past
We have seen this play out before in Brazil – lower interest rates, government spending and state intervention, which ultimately resulted in Brazil’s biggest downturn for many years, and a presidential impeachment. Back then Brazil’s debt to GDP was much lower - below 60%, and US interest rates were at 0,25%. Times have changed.
A new central bank President takes office in January 2025 and while this brings its own set of concerns - namely whether a monetary or political agenda will be pursued - the latter being a big concern for the market, what will be more apparent is that 7 of those committee members will be presidential appointments. Three members, including the current President, will leave their posts at the end of December. If this committee were to advocate for lower interest rates, it could potentially lead to a resurgence in inflation.
Currently, inflation has been kept under control at under 4%. Other concerns, such as central bank reserves, and what to do with them in the future are not yet on investors radars. While these reserves are intended primarily for stability within the financial system, economy, and currency, any mention of funding ‘temporary deficits’ in the future using central bank reserves should make you shudder.
The government has also relaxed its fiscal targets and is now aiming to deliver a zero deficit in 2025, rather than 2024. At best, the local market has been sceptical about the government’s fiscal targets, and as these have been changed only 7 months after the initial approval by congress, markets have digested the news badly resulting in a stronger USD vs the BRL with local stocks under pressure. The lack of perceived seriousness about rising debt and budget deficits should not surprise anyone who has had previous experience of the Brazilian economy.
Global debt-to-GDP is a rocket to the moon
The question is, should you be worried and what if anything, do you do about it? Brazil is running a budget deficit of 7% with a growth rate of around 2%, and a current gross debt to GDP of 86% - according to the IMF – over 16% points higher than the emerging market average, and second only to China in terms of BRICS debt to GDP.
When observers say that this is unsustainable, what does that mean? The reality is that any country can run deficits close to or above GDP if global bond investors are willing to buy their debt at reasonable interest rates.
The US, UK, France, and Italy all have over a 100% debt to GDP ratio, but with decades, or centuries of reasonable credibility. Money printing, while inflationary, has to a certain extent worked in developed economies although, some would argue, that the price of Gold and Bitcoin is evidence of long-term fiat currency devaluation – a valid point, but for another time.
Brazil - Not the US, but also not Venezuela
Brazil, for me, falls somewhere in between the US and South Africa in terms of credibility and fiscal terms, not in financial market terms – Brazil is much closer to the US. Without a viable long-term plan to control spending, while not overtaxing, means that certain markets will remain open to attack, such as the local currency, which has lost over 400% of its value vs the USD since 1994, whereas the stock market index has risen over 9000% in the same period.
Even in a fractured world, where you would think Brazil can benefit from the emerging market disruptions in Russia and China, there will be little appetite for an incoherent fiscal strategy regardless of whether local rates are close to 10%, and even less appetite for a central bank that risks its credibility on behalf of an aging president. These are all scenarios that have less than a 50% chance at the moment, but as they say here… in good Brazilian Portuguese: fique de olho.
The canary in the gold mine
The good news is that right now, you shouldn’t worry too much. Brazil is growing, jobs are being created and inflation is in check.
The likelihood is that more sectors of the Brazilian economy will participate in growth this year, increasing consumption and tax collection, so 2024 could be like 2023 in the sense that the economy does slightly better than most people expect. Congress, which generally maintains a balance continues to make Brazil ‘investable’ and is still positioned to the centre right which suggests that it is unlikely to do anything to jeopardise Brazil’s growth.
The Brazil of 2002 is not the same Brazil, sure, there are still bottlenecks, bureaucracy, and some similar problems, but things have changed. The middle class is growing, labour laws have become more flexible, and personal consumption is growing. State interventionism and economic protectionism will never work, and I personally feel that the Brazil of 2024 and beyond does not want this.
Attitudes are changing, and the classic ‘caudillo’ figure so often associated with Latin American politics will become a thing of the past (see Argentina and Milei). Does that mean rising debt will disappear because we adopt free market policies... not necessarily, however, it is important to recognize change.
Brazilians are demanding educational opportunities; they will continue to demand better, and relevant preparedness for the 21st century economy. Entrepreneurism is alive and kicking in Brazil, even with high interest rates locally, and abroad.
A world-class financial market can provide solutions for local and global investors through private client and tech-based solutions.
So, should you worry about the rising debt and budget deficits over the next two years, no, not yet. I would suggest that the ballot box in 2026 will determine the path of Brazil’s debt, and from a purely observational angle, I would suggest that Lula has the face of a one-term President.
Article written by Alex Ball.
📩 Partner with I'm No Economist
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