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What Does Brazil's Election Mean For The Global Economy? Some Key Takeaways

Published 10/31/2022, 01:15 PM
Updated 07/11/2023, 03:20 AM
  • The return of left-wing Lula to Brazil's highest post completes a regional political pivot started in Mexico in 2018
  • Lula said his country, the world's third-largest food exporter is "not interested in the role of an eternal commodity exporter"
  • However, Brazil has undertaken a growing role in supplying the world's food in the face of the war in Ukraine—and has largely benefited

In Brazil's tightest run-off election ever, former left-wing president Luiz Inacio Lula da Silva returned to power after 12 years after securing 50.8% of the country's valid votes yesterday. It will be his third, non-consecutive mandate. Jair Bolsonaro is Brazil's first democratically elected president not to win a second term and is yet to concede defeat publicly.

In his victory speech last night at a hotel in the country's largest city, Sao Paulo, the 77-year-old Lula talked about reuniting a highly divided country, saying that "there's only one Brazil," a feat that appears unlikely given that Lula will face fierce opposition in the congress, senate and states.   

Brazil's political pivot is the latest and most significant in Latin America in the last few years. It completes a broad regional shift to left-wing nationalism that has overtaken Latin America by storm since Andrés Manuel López Obrador first took office as the president of Mexico in late 2018.  

While it remains early to assess the full implications of Lula's election, here are a few immediate takeaways relevant to the global economy.

Food Commodities

Brazil is currently the third-largest food producer in the world. It recently displaced the U.S. as the world's leading beef exporter and remains the greatest exporter of coffee and soybeans.

With tight global grain supplies due to the war in Ukraine, record drought in Europe and unusual rains in India and China, the South American country has emerged as one of the world's leading short-term solutions to the growing food-security problem.

However, in his speech last night, Lula said Brazil is "not interested in the role of an eternal commodity exporter." In turn, he vowed to prioritize small and medium rural producers, given that they provide the bulk of his country's internal food supplies.

The statement indicates a pivot from Bolsonaro's export-focused agricultural policy, which led to two years of record commodity exports for the country on the back of rising global prices.

A change in Brazilian agricultural policy would likely be a headwind to the world's food supplies, possibly resulting in higher market and consumer prices.

Unlike the U.S., Europe and China—which have already reached peak farmland—Brazil has been growing its arable area exponentially during Bolsonaro's government. This, in turn, led to environmental concerns, especially regarding the deforestation of the Amazon region.


While Lula did not mention anything specific about state-run corporate giants, like Petroleo Brasileiro Petrobras (NYSE:PBR) or Eletrobras (BVMF:LIPR3), the country's oil and electricity businesses, his political trajectory indicates the government will likely pursue a greater decision power in these companies.

During his former government, the president controlled the country's inflation through price-cap policies in both companies, overextending their balance sheets and leading to mediocre stock gains in the long run.

Furthermore, a major corruption scandal that engulfed the governments of both Lula and his successor, Dilma Rousseff, helped drag Petrobras to new lows.

That panorama began to change during Michel Temer's presidency in 2016, when the former president stated the company was to sell its immense crude oil production at prices on par with the U.S. WTI benchmark.

The liberalization of the company deepened with Bolsonaro, marked by a significant decrease in governmental ownership of ordinary stocks and the sale of many oil-exploration licenses to private foreign and Brazilian-based companies.

During that period, the company improved its operating margins and raised cash reserves, which led to a gain of roughly 130% for the stock. Petrobras also ballooned its dividend yield to nearly 35%.

Petrobras Long-Term Chart

However, on the downside, Brazilian electors bore the brunt of exponential hikes in gas prices in 2021 as the country's currency devaluated against the U.S. dollar and the commodity rose in global trading.

Also, during Bolsonaro's mandate, the Brazilian government maintained absolute voting control over the company, often interfering in the company's presidency and board of directors. (Read more about Petrobras here).

Petrobras is down nearly 4% as of the time of writing.

Currency And Stock Market

The Brazilian real has been one of the few currencies in the world to have gained ground against the U.S. dollar this year, up roughly 5%. The main reason is the assumption that the country's central bank is further ahead of the Fed in its monetary tightening cycle.

Base interest rates in the country have been running at 13.75%, and inflation has, in fact, subsided over the previous three months. Unemployment has also been trending down, and GDP estimates revised upward, a sign that the overall economy remains resilient in the face of the current global crisis.

Brazil is also less affected by the Russian invasion of Ukraine due to its energetic reliance on renewable sources, mainly hydropower. Natural gas comprises less than 10% of the country's energy matrix.

Those factors have made Brazil's stock market one of the year's leading global performers, with the benchmark iBovespa up 10% YTD. The benchmark has also been harvesting the fruits of high commodity prices due to its heavy exposure to agricultural and oil companies.

iBovespa Futures Daily Chart

During his first term, president Lula bet his economic policy on strengthening the country's internal market by improving middle and lower-class consumption through facilitated credit offerings and social welfare payments.

The bet appears to have worked, at least in the short term, as Brazil averaged a 4% YoY GDP growth during the first eight years of his mandate–a period in which the country's economy skyrocketed to the seventh-largest economy in the world, briefly challenging the U.K. for sixth position.

However, the policy also ballooned the country's debt, arguably leading to a decade of underperformance for the Brazilian economy on the back of a falling real and a struggling credit market.

Furthermore, Lula inherited a different fiscal situation on his first mandate, which gave his former economy minister, Guido Mantega, far more budget liberties than the country appears to have at the moment. 

Brazil's current debt is high due to pandemic social welfare, 13.75% base interest rates and increased spending from Bolsonaro's government over the last few months to boost his election chances. 

Experts claim the combination of Lula's governmental program and the country's current economic situation poses a significant challenge for the future.

Bottom Line

It won't be easy to assess the bulk of Lula's policy while his economy minister remains unknown to the general public. However, as Felipe Izac, an associate of Nexgen Capital, told Brazil, the macro conditions remain highly favorable for the country. "Today, Brazil is very well positioned economically, especially in comparison to the main emerging economies."

On the other hand, we must note that in his speech last night, the returning president came off as less market-friendly than in his previous mandate. However, given that the president will face a highly hostile congress and senate, the greatest likelihood is that any unorthodox policy won't pass. 

At last, any potential changes to Brazil's food production chain could majorly impact an already strained global market. It will be interesting to watch how agricultural commodity markets will react in the short and mid-term. 

Disclosure: The author holds a long position on Petrobras, although he sold most of his stake after the first round of elections this year. 

Latest comments

Congratulations, extremely well written but I see that you avoided to touch the most sensitive point. Lula is a crook and the team that is behind him as well. All this people were deeply involved in the 2 worst corruption scandals of brazilian history (Car wash and Mensalao) and are back through clever maneuvers from the Supreme Court justices (8 out of 11 appointed by Lula and Dilma and all of them are lawyers not career judges) that annuled all the trials against Lula, including the ones he was condenmed already in several instances and was jailed for that, under the argument it was sent to the wrong federal jurisdiction, the jurisdiction choosen by the almost the same Supreme Court justices back in 2014/15 ...!!!. The country will pay a high price for that once more unfortunately. The half of the population that did not vote for Lula is composed by the individuals with a higher education and income level.
Yes, Lula is corrupt to the core and not a good candidate for presidency, and neither was Bolsonaro, who sought 100-year secrecy to cover the mess his own family and party is involved in. Talk about clever maneuvers.. It is no surprise that middle and upper classes would rather vote for Bolsonaro: It is very easy to lean right when you have a decent income. The same cannot be said for at least 13% of the population below the poverty line and another 40-50% struggling to make ends meet. The polarization between leftists and far right candidates over the last two decades has eroded the central position that is always preferable to extremes on the long run. This childish fighting between ideologies is the main factor for the falling Real, and it will remain so as long as incompetent candidates with no understanding of economics are given that much influence.
I think any alternative is better than president Bolsonaro, who is burning down the Amazon forest as widely reported. I agree with the analysis. Good point about Petrobras.
Nice, very accurate and unbiased article.
It is very important do not  forget that for every 51 Brazilians who risked giving power to the political group that almost ruined Petrobras, 49 Brazilians did not vote for him because they know the risk and the past of obscure actions. Lula and the PT were the main generators of this nefarious antagonism, therefore, the speech is exactly what the World wants to hear, but exactly the opposite of what the country needs, and they will do.  Please, Thomas, take note and at 2026 we will prove it.
I’m not a specialist in Brazil, but I couldn’t disagree more.
  About what....?? The level of corruption that existed during Lula and Dilma mandates. You surely know nothing about Brazil
Nice good article about Brazil economy activities...
Let's hope that Brazil now plays a more active role in foreign trade. thanks for the insights!
socialist takeover a country at a time.
The region is known for instability due to politics.. goodluck
Nice impartial assessment of Brazil! Congratulations!
Very well written!
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