Brazil’s Economic Struggles Intensify

January 25, 2025 TruthUSA

Brazilians are facing financial troubles due to a deflated local currency, inflation, and an exodus of investors.

Analysis

Brazil’s economy struggled last year with rising inflation, a deflated currency, and decreased investor confidence, a situation expected to worsen in 2025.

Concerns about rising debt and President Luiz Inacio Lula da Silva’s reluctance to cut government spending have led to a loss of investment, as reported by Rane analysts.

This led to a significant drop in Brazil’s financial assets at the end of 2024, with the U.S. dollar rising by 7.2 percent against the real in just over a month.

During the same period, Brazil’s main stock index, Ibovespa, plummeted by 7.4 percent.

In 2024, Brazil’s stock market and currency were among the worst performers globally due to the sharp devaluation of the real.

Finance experts share concerns about Brazil’s increasing debt trajectory, as noted by the French banking group Crédit Agricole in a January report.

Despite sustained economic growth, the trend of debt reduction witnessed in 2021–2022 has reversed, with a new fiscal anchor appearing ineffective and tarnished.

A stronger U.S. dollar and ongoing inflation are adding to the financial strain faced by Brazilian residents and businesses, diminishing the real’s value.

Noting the impact on purchasing power, local economist Max Cohen highlighted the adverse effects on all Brazilians due to the reduced value of the real.

He also pointed out that under President Lula’s administration since 2023, challenges like inflation, poverty, and currency fluctuations have worsened, leading to increased poverty.

Data from the World Bank showed a reduction in poverty in Brazil between 2021 and 2022.

Although officials reported a 40 percent drop in extreme poverty in 2023, higher prices and reduced purchasing power continue to pose challenges for many.

A supporter of Brazilian presidential hopeful Luiz Inacio Lula da Silva hangs a flag with a photo of the candidate on her street stall during the presidential run-off election, in Rio de Janeiro, Brazil, on Oct. 30, 2022. (Mauro Pimentel/AFP via Getty Images) — A supporter of Brazilian presidential hopeful Luiz Inacio Lula da Silva hangs a flag with a photo of the candidate on her street stall during the presidential run-off election, in Rio de Janeiro, Brazil, on Oct. 30, 2022. Mauro Pimentel/AFP via Getty Images

“The average Brazilian is facing a rising cost of living due to inflation and currency devaluation, making essential goods more expensive,” said Brazilian tax attorney Paulo Ricardo Alecrim.

Alecrim highlighted concerns about unemployment and a weak currency contributing to economic insecurity, making financial planning and saving more challenging.

“Imported goods have become more expensive due to the devaluation of the real, while inflation has eroded purchasing power,” added Alecrim.

He also mentioned that many Brazilians struggle to cover basic expenses like food and housing, leading to increased delinquency rates and declining consumption.

According to Alecrim, the high tax burden in Brazil complicates the situation further, with recent tax reform legislation potentially exacerbating economic challenges.

Approved reforms include a value-added tax of up to 27.5 percent, positioning Brazil among countries with the highest consumption tax rates globally.

Economists like Shireen Mahdi have expressed concerns about the impact of these tax changes on purchasing power.

In addition to tax issues, Cohen highlighted inflation as a major concern for Brazilians, especially given the impact on credit availability.

The Real Plan, launched in 1993, played a crucial role in curbing hyperinflation in Brazil, according to the Central Bank.

A significant amount of the investor exodus in 2024 was linked to concerns over President Lula’s spending plans, particularly related to expanding welfare subsidies and mandatory expenditures.

Despite the challenges faced by Brazil’s financial markets, Jason DeVito, a portfolio manager, remains optimistic that legislative measures will help manage debt growth.

Brazilian President Luiz Inacio Lula da Silva and First Lady Rosangela Lula da Silva arrive at the Planalto Palace in Brasilia on Jan. 14, 2025. (Evaristo Sa/AFP via Getty Images) — Brazilian President Luiz Inacio Lula da Silva and First Lady Rosangela Lula da Silva arrive at the Planalto Palace in Brasilia on Jan. 14, 2025. Evaristo Sa/AFP via Getty Images

“President Lula may face legislative limits on spending, despite his intentions to increase it. Businesses are concerned about rising debt and its impact on the investment climate,” DeVito said.

Many Brazilians, including Alecrim and Cohen, emphasize the need to cut government spending to prevent further economic decline.

“Strict fiscal discipline is essential to reduce the public deficit, attract investments, and provide legal security for entrepreneurs,” Alecrim stated.

He also emphasized the importance of reducing state intervention and promoting private enterprise to regain investor confidence.

“Empowering private enterprise is crucial for economic and social development,” Alecrim concluded.

Cohen agreed, suggesting that reducing government costs, eliminating mistrust to attract foreign investment, and promoting transparency in communication are necessary steps to stabilize the economy.

He also predicted challenges in economic relations between Lula’s government and the United States, especially in light of contrasting ideologies.

Larry Ellison, Executive Charmain Oracle listens to U.S. President Donald Trump speak at the White House on Jan. 21, 2025, in Washington. (Jim Watson/AFP via Getty Images) — Larry Ellison, Executive Charmain Oracle listens to U.S. President Donald Trump speak at the White House on Jan. 21, 2025, in Washington. Jim Watson/AFP via Getty Images

“Brazil may struggle in foreign policy and international trade with the U.S. under Lula’s government due to opposing ideologies,” Cohen opined.

As Brazil takes on the BRICS presidency in 2025, the alliance’s anti-West stance and trade implications present additional challenges.

Trump’s threats of tariffs against BRICS members if they introduce a competing currency to the U.S. dollar further complicate Brazil’s trade relationships.

“The focus now is on commitments from these countries regarding currency initiatives to avoid trade repercussions,” Trump stated.

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