Geraldo Lamounier shares his view as an investor and advises leaders on achieving better performance in the economic sector.
Geraldo Lamounier, our guest this time, is one of the founding partners of ETRNTY Family Office, a Multi-Family Office created to help families manage their wealth holistically.
The world we live in......
We are witnessing times of great transformation and a complex situation that may bring profound, non-obvious impacts. A New international Order is taking shape as a result of trade disputes between the US and China, wars in Europe and the Middle East, and a rising cost of living worldwide. This environment has caused deep fragmentation in societies, reviving extremism on both the right and the left, given the high level of dissatisfaction, social inequality, racism, religious intolerance and few prospects of improvement. We arrived at this situation through a long process of hyper-globalization and technological transformation that generated neither income distribution nor opportunities for the great majority of people.
At the same time, we are seeing a worsening of the financial conditions of several developed countries through an enormous increase in the ratio of public debt to GDP, in many countries well above 100%; in other words, countries owe their taxpayers and creditors more than 1 year of the country's entire output. A scenario of high and persistent inflation has led central banks to keep interest rates higher than we have seen in the last 15 years, which will increase countries' indebtedness through the cost of debt, in addition to the increase in military spending by the main global powers, which adds to public deficits.
It is true that we have lived through situations like this before, in the period after World War II; at that time, governments created financial incentive programs to boost economic growth and the reconstruction of several countries, alongside a world population that was growing at a fast pace. Today we live in a very different environment: we are seeing the end of population growth and the consequent aging of the population. To give a sense of the scale of this process, the projection for China is a population decline from the current 1.4 billion to 700 million by 2100. That means fewer people working and consuming goods, services and real estate.
These global transformations may bring significant impacts for Brazil, both good and bad. In the process of reorganizing production chains, we could encourage investment in setting up new manufacturing plants in Brazil to serve the American market, but because of our tax complexity and ideological distance from the US, we are losing this opportunity, mainly to Mexico.
Our main domestic challenge is the fragile fiscal situation. The Brazilian Government insists on a significant real increase in spending while revenue growth shows that it has reached its limit; as a result, fiscal sustainability has become even harder to achieve. The central government's total primary revenue rose 8.4% above inflation in the first half of 2024, and even so the government posted a worrying public deficit. It is enough to recall that, over the last 12 months, the Brazilian public sector accumulated a deficit of more than one trillion reais.
This scenario of uncertainty has driven a number of foreign investors away from Brazil, causing a sharp depreciation of the real (an impact on the exchange rate) in recent months and consequently making it unfeasible to continue cutting interest rates.
Another pillar that could help here is the Tax Reform, which is moving forward in the approval process. It is worth remembering that the focus of the reform is not the necessary fiscal adjustment but rather increasing the efficiency and productivity of the Brazilian economy, as a reform that is neutral in terms of the tax burden and that does not entail a loss of revenue for the federated entities. Fiscal balance, therefore, is not likely to be achieved by this route. That bill will be left for the next government, which will have to make significant budget adjustments and will probably face a difficult discussion about mandatory expenditures, which the 1988 Constitution enshrined.
Mandatory primary expenditures maintain a historical trend of growth in real terms, so the only escape valve for the Executive is freezing discretionary spending. As a result, a discussion has begun about the level at which the machinery of government would become unworkable, that is, what minimum level of discretionary spending is needed to keep public services running. We are living through this discussion, and it will clearly generate tension among the 3 branches of government.
Nothing obvious for the near future.
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