Lula’s G-20 Moment Slips Away and His Problems Are Only Mounting

This week, Brazil’s Luiz Inacio Lula da Silva was supposed to cement his status as the preeminent leader of the developing world.

Author of the article:

Bloomberg News

Martha Beck, Simone Iglesias and Barbara Nascimento

Published Nov 19, 2024  •  4 minute read

q7zqzycg}0y2tr]8q91}fxw9_media_dl_1.png International Monetary Fund (IMF

(Bloomberg) — This week, Brazil’s Luiz Inacio Lula da Silva was supposed to cement his status as the preeminent leader of the developing world.

Instead, the chaotic Group of 20 summit he hosted in Rio de Janeiro highlighted his inability to bridge growing divisions between global superpowers. Gaffes at the hands of the Brazilian government marred the meetings that many called the most disorganized G-20 in recent memory.

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Brazil watchers may now remember the gathering as the start of a far more difficult phase of Lula’s presidency: Donald Trump is returning to the White House and promising to upend trade with China, Brazil’s biggest economic partner, just as investors are growing worried about Lula’s spending.

In a surprise anti-climax, Lula suddenly canceled his end-of-summit press conference Tuesday afternoon, two hours after it had been scheduled to start. The official justification, that Lula’s bilaterals had ran too long and he needed to get back to the capital to host China’s Xi Jinping, only added to the sense of chaos that permeated his G-20. 

An ominous sense that something was wrong in Rio emerged when Lula’s wife hurled an expletive at billionaire Elon Musk before the summit even started, and deepened during a messy family photo with the participation of about 50 leaders and government officials — except President Joe Biden. Criticism of Lula’s imperious handling of the summit spiraled out of control when the leftist president abruptly ended negotiations on the G-20 communique Monday night, hitting the publish button while leaders were still discussing tweaks to language on Russia’s war in Ukraine and the conflict in the Middle East.

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“It is not enough if the G-20 does not find any clear words on Russia’s responsibility in this matter,” German Chancellor Olaf Scholz told the press. “But at the same time, it shows the impact that geopolitical tensions naturally have on the G-20. The wind blowing in international relations is getting rougher.”

Xi’s state visit to Brasilia on Wednesday is part of Lula’s efforts to rely more on Beijing for the investment Brazil needs. Right after that, Lula will be left to deal with investors who say the room to boost the economy with fiscal stimulus has run out as inflation and interest rates go up.

“Lula’s reelection depends on his ability to get the economy moving and bring interest rates down,” said Matias Spektor, an international relations professor at the Getulio Vargas Foundation in Sao Paulo. “This becomes virtually impossible if Trump manages to do even a fraction of the promises he made on the campaign trail.”

At home, Lula’s spend-and-grow recipe for economic progress was already in jeopardy. The approach produced rich rewards for markets and regular Brazilians during his first two terms in office, but its now running up against investor demands for Brazil to cut back on expenses.

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The worry among investors is that Lula’s fiscal largesse will fuel consumer price increases that will compel the central bank to rapidly boost interest rates and potentially keep them elevated for years, hurting Brazil’s corporate sector and sapping economic growth in the decades ahead. Already, Brazil is in the midst of a rate-increase cycle when most of the rest of the world is cutting.

The real has weakened nearly 16% against the US dollar since the beginning of the year, among the worst-performers in emerging markets. 

At least for now, the veteran leader appears to see little need for change.

Brazil’s president broadly dismisses deficit concerns as bellyaching by wealthy investors, saying that robust government spending is needed to help tackle poverty, improve infrastructure and foster a green energy transition. While his finance minister is working on an austerity proposal, it’s been delayed several weeks amid Lula’s hesitance to bless cuts that would affect social programs, fueling speculation that it’s unlikely to go far enough to reset the fiscal trajectory. 

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“The risk for Brazil at this moment is that it will jeopardize the country’s growth in the coming years,” said Jeferson Bittencourt, head of macroeconomics at Asa Investments. “As it stands, Lula’s fiscal policy could condemn the country to mediocrity.”

There are accomplishments Lula can point to two years after returning to office. The economy is expected to grow above 3% in 2024, a respectable rate for a developing nation, unemployment has dropped and and Moody’s Ratings recently raised the country’s credit score. 

But investor tolerance for Brazil’s fiscal issues became even lower after Trump’s victory boosted bets on a stronger US dollar and higher global interest rates. As that creates a tougher environment for developing nations, the status of public accounts takes on greater importance, according to Gustavo Pessoa, a partner at Legacy Capital, one of the largest independent funds in the country.

“In the short term, the risk is of inflation getting out of control,” Pessoa said.

Finance Minister Fernando Haddad has said he understands market anxiety about the country’s finances, and that investors will be comforted by his spending-cut plans. 

But just like the president ignored pleas from US and European allies in Rio, there’s a risk he would also give the cold shoulder to investors.

—With assistance from Vinícius Andrade, Giovanna Serafim, Michael Nienaber and Andrew Rosati.

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