😵‍💫 Sleepless in Brasília

Why markets fear Lula will follow in Dilma Rousseff’s footsteps 

In a note to clients in early December, Deutsche Bank described Brazil’s current administration as “Dilma II, Reloaded,” conjuring up comparisons to policies from the Dilma Rousseff government (2011-2016) that were widely blamed for plunging the country into one of its deepest recessions at the time. More recently, other market analysts have echoed similar concerns about the government’s economic trajectory.

What they are saying. Critics point to President Luiz Inácio Lula da Silva’s reliance on quasi-fiscal expenditures, which do not count toward the fiscal framework’s targets. They cite allocations for initiatives such as disaster relief in Rio Grande do Sul and the recent uptick in gross public debt as red flags that could spell trouble for Brazil’s economic stability.

• French bank Crédit Agricole was the latest to sound the alarm, telling clients that “the shadow of fiscal unbalance looms over a fast-growing economy.”

• “The trend of debt reduction observed in 2021 and 2022 has reversed, the new fiscal framework appears ineffective or already lacks credibility and the current rise in debt is alarming investors,” the bank noted.

Déjà vu? A confidence crisis is hitting the government as markets are reminded of the Rousseff government. Despite her lack of electoral experience, she was handpicked by Lula to carry the Workers’ Party banner in the 2010 election. 

• Her spendthrift policies led to the worst recession in Brazilian history (until the pandemic) and fueled voter discontent. The economic and popularity crises spiraled into a political crisis, and Rousseff was impeached in 2016.

Yes, but … While there are qualitative parallels between Lula and Rousseff, there are significant quantitative differences, said Bráulio Borges, an economist at the Brazilian Institute of Economics at the Getulio Vargas Foundation (Ibre-FGV) and consultancy LCA. Borges has extensively studied the 2014-2016 recession. 

Not a remake. “The government may be attempting to replicate certain policies, but we need to examine the intensity with which they are being implemented,” he told The Brazilian Report, highlighting several key distinctions:

• First, Borges highlighted the state of the economy when Rousseff’s policies were implemented. At that time, Brazil’s economy was overheating and the Brazilian real was overvalued, contributing to a current account deficit of nearly 5% of GDP. 

• Today, the signs of overheating are more nuanced — although, by some estimates, the economy is experiencing its longest product-gap cycle since the recession. Meanwhile, the real remains undervalued, and the current account deficit hovers near 2% of GDP.

• Secondly, he noted that the fiscal deterioration under Rousseff was both rapid and severe, with Brazil’s primary structural balance plunging from a net positive to a negative in under four years. By contrast, while the country is currently running deficits, there is no clear worsening trend, and projections for 2024 suggest a partial recovery of the fiscal drop seen in 2023.

• One example of this contrast lies in how the government is utilizing the National Development Bank (BNDES). While lending volumes under President Lula have increased, the growth has been less dramatic than in the early 2010s. 

• More importantly, the bank now uses an interest rate pegged to market rates rather than heavily subsidized loans.

• Borges also pointed to the Central Bank’s independence, a reform implemented in 2021, as a crucial shield. This autonomy ensures the monetary authority is less likely to repeat its actions of 2011, when it cut the benchmark interest rate under political pressure despite high inflation.

What worries investors. Financial markets have never been fond of President Lula, but there is more to their current fears. Rousseff’s economic mishaps were largely driven by electoral ambitions. As Lula said in a cabinet meeting, “the 2026 election has already started” for this administration — fueling fears of a similar trajectory.

• This concern was evident when the government’s December announcement of budget cuts, tied to a promise of income tax exemptions for those earning under BRL 5,000 a month, rattled markets so much. 

• “There are two visions within the Lula administration,” said Borges. “The economic team aims to meet fiscal goals, while the political side, including the president, focuses on electoral priorities. Markets are pricing in a future where politics outweigh economics.”

Looming risks. Adding to these concerns are recent declines in Lula’s approval ratings and a series of setbacks for Finance Minister Fernando Haddad, whose reputation suffered further amid a PR crisis fueled by disinformation about tax increases.

• Compounding the challenges is an increasingly precarious international outlook, with the new Donald Trump presidency posing heightened risks for emerging markets like Brazil.

Will this time be different? Even if the government pursues expansionist policies, Borges believes markets are now less tolerant of fiscal imbalances, which could limit the damage. “That doesn’t mean they won’t try,” he added. “But it will be an uphill battle.”

• The first test, he said, comes in late February, when the government will release a budget report outlining spending contingencies to meet the 2025 fiscal framework targets. Last year, amid municipal elections, similar cuts were delayed until the second half of the year.

• The market’s anxiety is already visible in the steep drop of the Brazilian real, which fuels inflation and borrowing costs, risking fiscal dominance. 

Bottom line. Borges stressed that regaining market trust is imperative, warning that the government’s continued clashes with financial markets have already exacted a toll — and the consequences could deepen further.

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The investigation keeping politicians up at night

Nearly 11 years ago, a federal probe into a small currency exchange shop in Brasília unraveled a money-laundering scheme that would shake Brazil’s political establishment to its core. Dubbed Operation Car Wash, it unearthed sprawling corruption networks implicating every major political party, igniting an anti-establishment fervor that has yet to subside.

• Now, a new investigation threatens to inflict similar damage. 

👉 Why it matters. Operation Overclean is delving into allegations of fraud in public contracts and embezzlement of congressional budgetary grants, a scheme that may have siphoned BRL 1.4 billion (USD 232 million) over four years.

Brasília, we have a problem. Last week, a trial court referred the case to Brazil’s Supreme Court. That reportedly happened because the list of suspects includes at least one federal lawmaker — who, under Brazilian law, can only be investigated with the high court’s authorization.

Pace, push … prevail? The progress of cases in the Supreme Court is heavily influenced by the justice assigned as rapporteur and how much of a priority it is given by the court. The rapporteur, who oversees inquiries, sets the tone for their progress — a process that varies depending on how each justice chooses to manage a case alongside their regular docket. 

Rapporteur. The Operation Overclean case was randomly assigned to Justice Nunes Marques, although the Federal Police requested it be reassigned to Justice Flávio Dino (who is already deeply involved with issues related to budgetary grants).

What they are saying. “Recent experience has shown the institutional challenges of conducting investigations directly in the Supreme Court, where there is a huge volume of cases,” Guilherme France, manager of Transparency International Brazil’s Anti-Corruption Knowledge Center, tells The Brazilian Report. “Those with major political and economic repercussions often take precedence.”

Protagonist. In late December, the investigation zeroed in on Marcos Moura, a businessman dubbed the “Trash King” and a prominent figure within the right-wing União Brasil party. While largely unknown on the national stage, Moura wields significant political influence in today’s landscape.

• His clout is tied to the billions of reais channeled through parliamentary budget grants, which fund municipal contracts across the country. 

• Moura has reportedly secured over BRL 1 billion in contracts from the city of Salvador alone (which are unrelated to the grants). Many credit his business prowess to his friendship with former Salvador Mayor Antônio Carlos Magalhães Neto.

• During the operation, police detained Moura for nine days and seized a spreadsheet from his possession that listed dozens of local governments with substantial budgets. The discovery has heightened suspicions of a sprawling network designed to embezzle public funds.

Zoom out. The potential scandal stems from the indiscriminate use of budgetary grants by lawmakers. Amounting to roughly one-quarter of the government’s discretionary spending, they allow members of Congress to earmark chunks of the budget to projects of their choosing. Opaque rules governing these earmarks have allowed corruption to run amok.

Suspicions. According to the police, Marcos Moura acts as a political coordinator for a criminal organization involving politicians in the embezzlement of public money. He denies any wrongdoing. Between 2022 and 2024, he visited offices in the lower house 27 times to meet with lawmakers from different center-right and right-wing parties. 

• The feds have found BRL 1.5 million in cash with businessmen traveling between Bahia and Brasília in a plane chartered by the Trash King. 

Pulling the thread. The investigation began after the Federal Comptroller’s Office uncovered evidence of irregularities in contracts tied to the Bahia office of DNOCS, a federal agency tasked with anti-drought projects. Investigators now suspect the scheme extended far beyond, encompassing services ranging from garbage collection to the distribution of school supplies in multiple states.

Upper echelons. The investigation has drawn close to Senator Davi Alcolumbre, who is set to win the Senate presidency in February, and Elmar Nascimento, the outgoing União Brasil whip. Alcolumbre’s chief of staff was cited by suspects, while Nascimento has drawn police scrutiny over the grants he directed to a city of which his brother is mayor. Alcolumbre reaffirmed trust in his chief of staff, while Nascimento has not addressed the case.

Blueprint and pitfalls. Investigators involved in Operation Overclean are weighing the possibility of offering plea deals to suspects in exchange for information about the scheme’s masterminds.

• Plea bargains were instrumental in making Operation Car Wash so huge. However, Car Wash’s legacy is marred by instances of due process violations by prosecutors and judges, which have since led to the annulment of many of its convictions. In response, Congress established clear parameters for plea bargain deals.

• Whether Operation Overclean can avoid repeating those mistakes remains an open question.

Where was it hottest in Brazil’s torrid 2024?

As we reported in the Jan. 9 issue of our Brazil Climate newsletter, 2024 was the hottest year ever recorded in the country, with average temperatures exceeding 25 degrees Celsius (77 degrees Fahrenheit) for the first time.

• Now, thanks to statistical analysis from Ana Paula Cunha, a researcher at the National Center for Monitoring and Alerting of Natural Disasters (Cemaden), we can pinpoint exactly where Brazil was hottest in 2024.

👉 Why it matters. While cities in the Center-West region of the country saw the mercury hit all-time highs in 2024, the biggest climate anomalies of last year were found much further to the south — specifically in the states of São Paulo and Paraná.

Methodology. Cunha cross-checked temperature data from Cemaden and Copernicus’s ERA5 climate database to show municipal temperature differences between last year and averages recorded between 1941 and 1970.

• Her reasoning not to use the pre-industrial (1850-1900) temperature averages adopted by the Paris Agreements was that such measurements for Brazil, at a municipal level, would be far too unreliable.

Hot spot. Curiously enough, of the top 10 climate anomalies identified by Cunha, all municipalities are located in a small area of roughly 250 square kilometers (around 96.5 square miles) on the Paraná-São Paulo state line. The region in question, on either bank of the Paranapanema River, saw average temperatures last year that were over 3.1°C higher than the 1941-1970 mean.

Trending up. The previous year was already extremely hot in Brazil — indeed, it was the hottest on record prior to 2024. However, as shown by the map below, the temperature anomalies compared to the 1941-1970 mean were not nearly as stark.

Quick catch-up

🛬 The Rio de Janeiro-Galeão Airport (GIG) will reportedly be put up for auction, with the minimum bid expected to be between BRL 900 million and 1 billion. The airport was auctioned off in 2013 and is controlled by a joint venture between state-owned company Infraero (49% stake) and Singaporean group Changi (51%). Infraero is set to leave the joint venture with the auction.

• Changi wanted to hand back control of the airport to the federal government, though later changed its mind after policymakers tried to force more flights to fly to and from Galeão (which is poorly located compared to the city center’s Santos Dumont Airport).

🇺🇳 André Corrêa do Lago, Brazil’s top diplomat for climate and environmental issues, was confirmed as the president for COP30, the UN Climate Conference to be held in Belém this year. He lamented the US’s exit from the Paris Agreement.

⛽ Petrobras's board will reportedly meet next Wednesday to discuss the company’s fuel pricing policy as the gap between its prices and international benchmarks widens (to 14% for gasoline and 27% for diesel). Meanwhile, the Lula administration pressures the company against price hikes amid inflation concerns.

🤳 The Solicitor General’s Office summoned 41 companies and organizations for a hearing next Wednesday to discuss ways to fight disinformation and foster basic rights on digital platforms. The move comes as platforms adopt a hands-off approach to content moderation.