Brazil's Growth Spurt Shadowed By Concerns Over Spending Plans - Reuters Poll

Brazil's growth spurt this year has been overshadowed by worries about an increasing number of hastily put-together spending plans ahead of October's presidential vote, dampening the outlook for 2023, a Reuters poll showed.

Economic activity got an unexpected lift in the first-half from skyrocketing commodity prices for Brazilian exports as a consequence of Russia's invasion of Ukraine. However, investors are looking at other issues ahead.

The main concern is a growing focus both by the government and opposition on quick political fixes to alleviate persistently high inflation, seen as a diversion from long overdue reforms, that is starting to unsettle markets.

Gross domestic product is forecast to expand at a slow 1.4% rate in 2022, according to the median forecast of 34 economists polled June 28-July 8 - still better than the meagre 0.5% clip expected in April's survey.

But the view for 2023 was downgraded to just 0.8% from 1.5% previously, also reflecting prospects for more months of steep interest rates amid lingering uncertainty over the conflict in Eastern Europe.

"While the terms of trade give some breathing room ... fundamentals remain vulnerable, especially for Brazil on the fiscal side," analysts at Allianz wrote in their July economic outlook report.

Last month, Congress approved tax cuts aimed at lowering fuel costs, an inflation-fighting attempt backed by President Jair Bolsonaro. Now, lawmakers are debating another bill to bypass the country's spending cap and boost social benefits.

Former Brazilian President Luiz Inacio Lula da Silva, the frontrunner in voter preferences, wants to scrap the fiscal ceiling altogether and revise the current budget framework to put in place a new one.

ASSET PRICE STRESS

"There is very little appetite for fiscal austerity ... which points to an environment in which Brazilian asset prices are likely to remain under pressure," Kimberley Sperrfechter, EM economist at Capital Economics, said.

While Brazil's real has shed some of its recent gains and could weaken further due to the budget loosening, an escalation to the kind of foreign exchange drama that caused wider disruptions in the past is off the table.

Banco Central do Brasil's aggressive rate hike campaign, for a total 1,125 basis points since last year, has been a mainstay of the country's financial stability. But the bank is now close to ending its tightening cycle, which could add uncertainty.

In Mexico, the central bank has some extra room left for policy tightening, according to median estimates in the poll. This is helping to anchor the country's economic forecasts, which came in little changed from the previous quarter.

GDP is set to expand 1.8% this year and 1.9% in 2023, slightly under April's poll estimates of 1.9% and 2.1% for 2022 and next year, respectively. Expectations for the Mexican economy remain subdued, though.

Soft investment prospects and increased structural rigidities will keep constraining activity in the medium-term, Moody's Investors Service said last week, as it cut Mexico's credit rating by one notch.

But all the threats floating over the biggest Latin American economies are dangerously materializing in Argentina, where the sudden resignation via Twitter of a finance minister unable to cope with massive imbalances ignited a crisis this month.

In current stormy conditions, "we expect inflation to accelerate even further in 2023," Isaias Marini, an economist at consultancy Econviews, said. "It could slow down by the end of 2024, provided a credible stabilization plan is put in place."

(For other stories from the Reuters global economic poll:)

(Reporting and polling by Gabriel Burin in Buenos Aires; Editing by Jonathan Cable and Bernadette Baum)