UPDATE 2-Brazil economy likely to remain weak in 2023, analysts say

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UPDATE 2-Brazil economy likely to remain weak in 2023, analysts say

BUENOS AIRES MEXICO CITY Reuters found that Brazil's economy will likely remain weak in 2023 due to the spending drive by President Luiz Inacio Lula da SilvaLula da Silva that keeps borrowing costs high for longer, as a result of a planned spending drive by President Luiz Inacio Lula da SilvaLula da Silva.

Lula's government, which took power on January 1, is increasing the size of welfare programmes that are well beyond strict budget limits to address deeply rooted social problems. The government of President Jair Bolsonaro did not keep within those rules.

Many investors and analysts fear a new wave of planned spending could put Brazil's debt on an even more unsustainable path and stir inflation, which is dropping after a long series of interest rate rises.

The central bank is set to keep benchmark rates high for a long time, but that may cause an economic slowdown and cause tensions with the government.

The growth is expected to drop sharply to 0.8% in 2023 from 3.0% last year, according to median estimates of 44 economists polled between Jan. 9 and Jan. 20. The growth forecast for this year was unchanged from an October poll, with 2022 upgraded from 2.7%.

The fiscal policy that is being implemented is the main reason for our negative outlook, according to Tomas Goulart, an economist at Novus Capital. He said that the central bank won't be able to lower its Selic rate, reducing growth for the next years because of the possible reinstatement of taxes on fuels to help pay for extra spending measures in 2023.

In the month of June, bank chief Roberto Campos Neto cited the restoration of taxes on fuels as one of the main factors behind his forecast of 5.0% inflation in 2023 -- an outcome that would surpass the 4.75% target for a third year.

Finance Minister Fernando Haddad presented a fiscal scheme to appease market concerns. He said that it was just a list of proposals that Lula had yet to approve and were prone to frustrations as well as more unexpected outlays.

Domestic markets, which have remained calm recently, could be tested after the Southern Hemisphere summer break and Carnival holidays as the government presses lawmakers to vote on a tax reform in the first half.

There are risks of higher inflation with the pass-through to consumer prices of a more depreciated exchange rate in case of a higher fiscal deterioration, said Mauricio Nakahodo, senior economist at MUFG.

Asked a question on the overall trend for Brazil's GDP growth in 2023, a small majority of seven of 12 said it was tilted to the downside, while three saw upside potential, and two said neutral.

The rise in commodity prices due to China's reopening, and the impact of Lula's policies on aggregate demand, should be offset by the 1 economy's improvement in terms of trade.

In 2023, Brazil's growth ranged from stagnation to 1.5%, while projections for Mexico varied between a 0.5% contraction and 1.7% growth, with the median in the survey pointing to a slowdown to 1.0% this year from 3.0% in 2022.

In a report, Citi analysts said that they expected activity to decelerate as the U.S. economy loses traction, the labor market improvement slows down, and real interest rates increase, despite the frictions between the central bank and government in Brazil. Mexican President Andres Manuel Lopez Obrador has praised policymakers for their work and supported business confidence.

The Mexican peso has been trading close to three-year highs against the U.S. dollar, reflecting a more subdued political climate than this month's chaos on the streets of Brasilia.