Lula’s Brazil: Geopolitical Linchpin or a Bridge to Nowhere?
Investors will judge if the country's ambitious diplomatic agenda can also help it take advantage of shifting global supply chains
It was either deft geopolitical acrobatics or classic “kicking the can.” G-20 finance ministers and central bankers agreed a communiqué last week to explore a tax on billionaires that would alleviate poverty and support climate transition while shuffling all the world's thorniest issues from Gaza to Taiwan to the Donbas into a separate document. Global fault lines derailed this group in April, so this was a victory for the Brazilian hosts.
But it begged the question of whether Brazil will benefit from its chosen role as eager intermediary amid fundamental geopolitical shifts. And even if it does, will it miss out on the massive reorientation of global trade now underway?
Brazilian diplomacy has made a brand of engagement without alignment, as a democracy that still talks to dictators and as a leader of the “Global South” that is courted in the world’s richest capitals. Wags dismiss the approach “polyamorous,” but it’s an attractive path for emerging economies that don’t see any reason to be caught in the great power crossfire.
Non-alignment doesn’t mean disengagement under President Luiz Inácio Lula da Silva. He will receive the G-20 leaders in Rio on November 18-19 fresh off the plane from Kazan where Vladimir Putin will host a BRICS summit. Indeed, the BRICS themselves will gather in Brazil next year. Separately, the country has applied to join the OPEC+ group of petroleum exporters even as it prepares to host the UN Climate Change Conference (COP 30).
The tensions in Brazil’s diplomacy are everywhere. Despite a long history of warm relations with Israel, Lula recently denounced the military intervention in Gaza as “genocide.” Brazil opposed Russia’s invasion of Ukraine but refused to join in Western sanctions. Surveys show that public opinion tilts modestly toward the United States over China, but fully a third view both countries favorably.
If Brazil can actually act as a linchpin in a global order that is shifting so rapidly, it may yet help alleviate international rifts that are widening on so many fronts. The question for investors is whether the country can take advantage of this role to bolster its own economic future or be little more than a bridge to nowhere.
Coincidentally, last week’s meetings coincide with the 30th anniversary since the appearance of the Brazilian "real," the currency that finally put an end to years of hyperinflation and reckless government spending. A combination of budget tightening, asset privatization and constitutional reforms helped bring inflation from 2,948% in 1990 to 66% in 1995 to roughly 4% today.
It’s a historic success, but the country still struggles with fiscal discipline and slow growth. The economy posted a surprisingly strong 2.9% rate last year on strong agricultural output and pre-election spending by the previous government. But investors fret over the current standoff between Lula’s government and the central bank, which has kept monetary policy tight and debt costs high. The stock market has fallen 5.6% so far this year and the real has celebrated its birthday with a steep 16% loss.
There’s little risk of an immediate financial crisis since the central bank has $360 billion in reserves and the IMF projects growth will recover next year on better hydrocarbon production and government spending for flood relief, but debt has jumped from 60% of GDP in 2011 to 85% today, and the pressures will only get worse if productivity stagnates.
Lula’s government needs to show as much commitment to attracting foreign investment as it does to its multilateral diplomatic ambitions.
Above all, Brazil needs to take on a long list of fiscal and structural reforms that will support more sustainable growth. But its diplomatic ambitions also offer an opportunity to position itself deeper into the shifting flows of global trade and investment.
China is by far Brazil’s largest trade partner, especially for soybeans and iron ore, and its powerhouse agricultural sector depends heavily on fertilizer imports from Russia. But foreign direct investment comes overwhelmingly from the U.S. and Europe which are working hard to mitigate the geopolitical risks of their supply chains.
As sanctions, tariffs and export controls continue to mount, Latin America’s most sophisticated industrial base should get a fresh look. Brazil just made it back on an influential survey of the world’s most attractive destinations for foreign direct investment, between India and South Korea, thanks in part to new commitments to improve infrastructure. Moreover, a country that Beijing, Moscow, Brussels and Washington are all trying to woo looks more likely to avoid the collateral damage.
But just because it’s a good idea doesn’t mean it will happen. Lula’s government needs to show as much commitment to attracting foreign investment as it does to its multilateral diplomatic ambitions. This includes a renewed focus on all the items that usually top an investor’s list like macroeconomic stability, better infrastructure and more transparent regulations.
Then and only then can they expect their bridge will draw traffic.
I suppose the same article could be written about South Africa (mutatis mutandis).