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Politics, Economics, Security, and Foreign Policy: What to expect from Lula’s Administration

Facts

 

On October 30, Luiz Inácio Lula da Silva was elected president with 50.9% of the votes, after the tightest and most polarized elections in the country since its re-democratization in 1985.

 

In Congress, Bolsonaro’s Partido Liberal (PL) won 19.3% of the seats in the lower house, meanwhile, Lula’s PT electoral coalition got 15.59%, União Brasil 11.5%, Progressistas 9.16%, MDB 8.19%, PSD 8.19%, Republicanos 8%, and the remaining 20.08% is distributed among 12 minor parties. While in the Senate, Bolsonaro’s PL will control 18.52%, PSD 13.58%, MDB 12.35%, União Brasil 11.11%, Lula’s PT 11.11%, and the remaining 33.33% distributed among 9 other parties.

 

As for public security, since 2017, homicide rates in Brazil, while still one of the highest in the world, have experienced an improvement from 65,602 to 41,100 in 2021, which is a decline of about 37%, and currently standing at its lowest level in over a decade.

 

In public spending -a flagship for Lula’s new administration- after negotiations on December 7, the Spending Bill was approved by the Senate allowing an increase of BRL 175 billion with a reduction from 4 to 2 years, which the lower house is set to vote on soon.

 

Analysis

 

Domestic Politics

 

An essential matter of concern for the new government is the presidential election in both houses of Congress. In addition to defining the agenda of the lower house, which may prevent voting on projects of the government, the president of the Chamber of Deputies also decides on potential investigations against the Executive, as well as on impeachment processes. With previous experience from Rousseff’s government, which faced impeachment after opposing the lower house’s president, Lula aims to support the incumbent Arthur Lira to be reappointed for the position, even though he was Jair Bolsonaro’s ally. Besides that, Arthur Lira has significant support within the lower house (around 321 of the 513 deputies), which is a great asset for Lula’s government to approve some of his main electoral campaign promises in that house. On the other side, in the Senate, the scenario seems more complicated to the upcoming government, since Bolsonaro’s party, which will have the largest bench in both houses in 2023, will launch a candidate to run for the presidency against the name supported by Lula.

 

However, it is unlikely to lead, in any case, to legislative paralysis, since several congressmen, even among parties currently allied to Bolsonaro’s government have a more pragmatic than ideological approach and tend to be willing to negotiate also with the future administration. Nonetheless, since Lula’s party did not elect a majority of congressmen in any of the houses, Lula is on the run to form a coalition government, which means in his upcoming mandate he will most likely need to make more concessions to get its agenda approved. Thus, it is more likely for Brazil to experience some degree of “democratic instability” than to follow any sort of authoritarian consolidation.

 

Finance and Economy

 

Income transfer and social assistance policies have been Lula’s main political triumph since he was first elected in 2002, and negotiations are ongoing to guarantee such social programs in Lula’s new government.

 

In response to Lula’s statements supporting an increase in social programs, the Ibovespa stock index fell 6% in a day, exchange rates rose by 5%, and currency debt rose in October, which could reach 90% of GDP by the end of 2026. Besides the sole discretion of investors, rent-seeking dynamics are crucial in shaping how public finance will look and they currently point to a scenario of more spending, monetary tightening, and reduced fiscal responsibility.

 

Finally, the recently announced Finance Minister is Fernando Haddad, who initially failed to inspire confidence regarding Brazil’s fiscal situation for the near future. Brazil’s bond spread for 10 years reached 13,5% in late November – a number not seen since the 2013-2016 crisis, as investors are commanding a higher premium with the prospects of a deteriorating macroeconomic condition. Additionally, PT has failed so far to appease international markets, who most likely will press interest rates well above 13,5% for at least until 2023. In addition, to make room for new spending, an overall tax increase is almost certain to take place somewhere in the future, with bills to tax profits, dividends, and large fortunes being the most obvious choice for Lula since the campaign.

 

Public security

 

Currently, there are around 50 criminal organizations, between Facções and milícias, operating across Brazil, acting in a wide range of illegal activities. So far Lula’s approach seems to intend to put into practice a new anti-drug policy, focused on risk reduction, prevention, treatment, and user assistance. Against organized crime, Lula proposes strengthening investigation and intelligence, and promotion of a nationally coordinated and integrated public security policy. The new policies in place may include the creation of a Public Security Ministry, out of the Ministry of Justice, which is still under debate, increasing restrictions on access to firearms, and increased prosecution of environmental crimes.

 

Homicide rates in Brazil, while still one of the highest in the world, have experienced an improvement since 2017 (which was recorded at 65,602 and dropped to 41,100 in 2021), with a decline of about 37%, and currently standing at its lowest level in over a decade. Despite not being a clear relation between ease of legal access to firearms and the decline in homicides there’s a potential risk of reversion in the current trend, as one of Lula’s top priorities seems to be restricting access to weapons to the general public.

 

Given the currently available information, Lula’s approach to public security may revolve around decriminalization or consumption and retail drug trafficking, and increased restrictions on access to firearms allegedly focusing more on organized crime, but no major policy changes are expected in public security.

 

Foreign Policy

 

In his first speech after his electoral win, Lula da Silva stated: “Today we are telling the world that Brazil is back. That Brazil is too big to be relegated to this sad role of a pariah in the world.” These words are telling about the interest of the upcoming administration to revitalize Brazil’s foreign policy. Despite Lula’s new administration most likely will not be as dynamic as his previous ones, his foreign policy may be signed by an increasingly closer relationship with China, the pursuit of a more advantageous environment in commodities trading, some efforts in regional integration, and a more prominent role in global affairs in general.

As to the expected person to occupy the Itamaraty Palace, so far Lula has expressed a preference for designating Mauro Vieira, a tenured career diplomat, as his soon-to-be minister of foreign affairs. This may indicate a pragmatic approach to the new administration’s foreign policy.

 

Reengagement with China

 

Brazil maintains a largely positive trade balance with China, its main trade partner (approximately USD 67.9 billion versus USD 36.4 billion, based on 2020 data from the Observatory of Economic Complexity –OEC), represented mainly by soy (30.8%), iron ore (27.3%), crude petroleum (16.7%), and frozen bovine meat (5.94%). Given this performance, it is to be expected that the new administration seeks closer commercial ties with China. In addition, we can expect more vibrant diplomatic support for China on other matters, as a counterweight to the United States, but not to the extent to present itself as a strategic challenge to Washington.

 

Russia and the war in Ukraine

 

Since the beginning of the Russian invasion of Ukraine Lula da Silva has inclined more towards criticizing Ukrainian leadership while mildly pointing fingers at the Kremlin stating that Kyiv has as much responsibility as Moscow for the war. Regardless of Lula’s statements throughout the campaign, which are inclined toward light support for Putin, it is likely that Brazil will attempt to play a conciliator role that fits into the clear aspirations of Lula to relaunch Brazil’s protagonism in global affairs.

 

MERCOSUL

 

It is a general expectation that Lula’s government will attempt to revive the Southern Common Market (MERCOSUL) and potentially try to pursue a trade agreement with the European Union, which was in a stall during the Bolsonaro administration. As the EU is trying to move away from Russia and more marginally from China, the current context presents significant advantages to Lula da Silva, despite the significant commitments Brazil would have to entail in climate change, deforestation, and agricultural practices. Thus, the achievements or level of success in this enterprise remain impossible to anticipate.

 

Regional Geopolitics

 

Priorities such as security cooperation, relationship with Washington, and which type of coalition will Lula become part of will shape the current outlook. In the first instance, Lula’s presidency may maintain its engagement with the existing security cooperation infrastructure, especially with the United States, however, there is a high chance that Brazil will limit or even reduce its engagement by seeking alternative or complementary partners, like China and Russia, especially in matters of equipment supply and even military drills, and other forms of cooperation.

 

The relationship between the new Brazilian government and Washington may present itself as amicably as Biden’s congratulatory position appeared enthusiastic about Lula’s electoral victory. But in a series of matters, there will be differences and limited cooperation. In matters such as climate change and the international prosecution of criminal activity, we may see a stable to vibrant cooperation between both governments, but in others such as Russia’s security interests, China’s economic influence, and the stance towards authoritarian regimes in the region may present more visible grievances.

 

Most likely Lula’s new government will be a close diplomatic ally to Colombia’s Petro and Mexico’s Andres Manuel López Obrador, and Chile’s Boric, and in a lesser manner to the regimes of Venezuela, Nicaragua, or Cuba.

 


 

By Luis Campos Perez, Editor in Chief – Americas Desk at Hozint – Horizon Intelligence

Victor Mendes, Editor – Americas Desk at Hozint – Horizon Intelligence

Vinicius Paulinelli, Analyst – Americas Desk at Hozint – Horizon Intelligence

 

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