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4 November, 2022

What Lula means for business and foreign investment in Brazil

Despite huge congressional challenges, Lula’s administration is a boon for Brazil’s business outlook, environmental programme and international relations.

By Sebastian Shehadi

President-elect Luiz Inácio Lula da Silva is set to take Brazil’s highest office, and for the third time. ‘Lula’, as he is commonly known, was president of Brazil from 2003 to 2010. In the country’s last election, he dramatically lost to outgoing leader Jair Bolsonaro after a controversial corruption charge that many have deemed as politically motivated. 

In the meantime, Lula served 580 days in prison, only now to jump back into power after a narrow victory over Bolsonaro. As such, he inherits a country split down the middle, which speaks volumes about the emergence of a Bolsonaro-driven (but not bound) conservative movement. 

“This movement, combining conservatism and nationalism alongside US-styled culture war politics, has its pillars in the vast interior of the country, supported by fast-growing evangelical churches, the security forces (especially military police) and a booming agricultural sector – accounting for nearly one-third of the country’s GDP,” says Jason McGeown, director of communications at Verisk Maplecroft.

This is the backdrop to Lula’s first day in office. With an adverse Congress dominated by opposition parties, Lula will struggle to pass many meaningful reforms. The roll-out of Lula’s so-called “social and fiscal responsibility” will be thoroughly scanned by a keen yet cautious business community, according to Maplecroft.

“People forget that Lula has historically been more pragmatic than other left-leaning leaders in the region, and we expect him to be even more pragmatic in his third term,” says Elizabeth Johnson, managing director of Brazil research at economic research provider TS Lombard. “He has formed a broad coalition with centrist parties and we expect that to continue with additional centre-right parties joining his coalition.”

For now, speculation is abundant. The actual direction of Lula’s administration will not be clarified until his cabinet is appointed. 

An important win for planet Earth 

Although Lula’s ministerial team will not be revealed until mid-November at the very earliest, several points can be made with some certainty. 

Lula’s environmental policy overhaul could be on a scale rivalling the proposed US Green New Deal. Therefore, the individual that will lead the president’s environmental team will become as important as the one who sits in the economic chair in Brasilia, according to Maplecroft.

Even before the election, Brazil was particularly well-positioned for foreign investment in the energy transition. “But Lula will put Brazil in an [even better place] for the energy transition and global decarbonisation, not least since he will push against deforestation, which is a major issue for global investors,” says Johnson. Lula has had a very positive track record of reducing deforestation, unlike Bolsonaro, who allowed enormous swathes of the Brazilian Amazon to be cut down.  

“Under Lula, Brazil will attract significant investment in next-generation fuel, including green hydrogen, sustainable aviation fuel, green diesel, offshore wind, green mining and green steel,” adds Johnson. “So this is something that Brazil can really benefit from, and Brazil is already receiving massive investments from Australian, European and American companies in this segment. We expect that to continue.”

A more business friendly and stable Brazil under Lula

Across the EU and North America, Lula’s election brought sighs of relief. 

“With the US and EU, relations will significantly improve. Lula has a close relationship with many European leaders who were very standoffish with Bolsonaro,” says Johnson. “The Biden administration also appears to be eager to have a solid relationship with Lula, after having an arm’s length relationship with Bolsonaro. We expect there to be a lot of good will on the environmental front, which will help Brazil attract more green investment.”

Regarding the relationship with China, Lula is unlikely to rock the boat. This means more Sino investment, which was already flowing strongly to the country, explains Johnson. “Chinese investors have been important investors in Brazil’s energy sector and mining, and we expect this to continue,” she adds.

Under Bolsonaro, several key reforms to the Brazilian economy were put on pause, chief among them being tax reform. “On this, we see a very positive outlook under Lula,” says Johnson. “For businesses and citizens this will be very positive since Brazil’s current tax code is Byzantine and very difficult to comply with.”

Lula’s tax reform will aim to simplify the system, thereby increasing the number of people who are paying taxes and decreasing Brazil’s tax burden. Johnson expects that, despite a centre-right Congress, Lula will be able to negotiate the reform.

The coming weeks will shed far greater light on Lula’s strategy, but given the state of Brazilian politics, and Lula’s carefully constructed coalition, policy battles are likely to be picked carefully. 

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