The Trump effect on Brazil’s economy
The return of US President Donald Trump introduces significant uncertainty to the global economic landscape. The promises made during his campaign suggest substantial changes to US foreign policy, immigration regulations, and fiscal policy in the coming years. These shifts could notably impact emerging economies, where trade is heavily linked to US demand and where monetary policy is tied to the Federal Reserve’s adjustments.
To understand how a sweeping Republican victory might affect emerging markets, particularly Brazil, we need to examine Trump’s campaign promises and their potential consequences once implemented.
Navigating the trade war
The US is likely to turn more inward-looking under Trump. Tighter policies on foreign trade are expected, with Trump threatening a 60 per cent tariff on all Chinese imports and a universal 10 per cent tariff on other inbound supply shipments. The sky-high tariffs on Chinese products is seen more as a negotiation tactic, with Trump likely to settle for lower duties after some discussions. Despite a generally positive bilateral relationship between Brazil and the US, the former may face indirect negative effects from trade protectionism. A depreciation of the Chinese yuan would essentially make Chinese products more competitive, to the disadvantage of Brazilian manufacturers. Brazilian exports to the US reached USD 40.3 billion in 2024 – an all-time high, as seen in Graph 1 – to buck the trend decline in total exports for the year.
The International Monetary Fund has revised upward its forecast for Brazil’s economic growth to 3.7 per cent in 2024 and kept its projection of a slowdown to 2.2 per cent in 2025. To benefit from Trump’s tariff war, Brazil must focus on investing in productivity given that the main products being exported to the US — namely soybeans, corn, beef, and minerals — do not enjoy a large production surplus. For investors, companies in these sectors will have space to grow under these conditions. Brazil’s sustainability initiatives, mainly through green bond issuances for the Amazon rainforest, are also attractive investment options.
Investments in the oil sector can also be a good bet. Near-term sanctions imposed on Iran and Venezuela have a greater potential to raise global oil prices, and Brazil, which maintains strong bilateral ties with the US, could further increase oil exports to the country as a familiar alternative.
The renewed tariff war forged by the US is pushing inflationary expectations higher in the months ahead. Other key parts of the Republican president’s agenda are tax cuts and more rigid immigration rules, both of which would exert pressure on inflation expectations. Altogether, these reduce the elbow room for the Fed to carry out subsequent rate cuts. Along with the US’ ballooning debt burden and strong job creation data, higher import tariffs lead to a rise in Treasury yields. Thus, Trump’s return to the White House could keep long-term interest rates in the US higher than initially expected, benefiting the dollar and making it even harder for the Brazilian real to appreciate.
Although the Brazilian Central Bank is not extremely Fed-sensitive, the end of the Fed’s easing cycle will act as additional fuel for Brazil’s rising interest rates and maintain a favourable rate differential against the US, as depicted in Graph 2.
Brazil’s central bank has defied the global rate-cutting trend as it decided in December to raise the key interest rate to 12.25 per cent, marking the third consecutive increase in 2024 as inflation has been sticky at above 4 per cent since June. The Selic interest rate curve already prices in a future policy rate of 14 per cent in response to elevated inflation expectations. In this context, fixed-income assets like IPCA+6% and government-issued bonds remain attractive options for investors in Brazil. Additionally, in this scenario of rising rates, post-fixed securities are also worth considering.
Deportation jitters
Brazil’s economy is gaining momentum, although a tight labour market and rising wages are exerting pressure.
An intensified US crackdown against illegal immigrants is another factor that would affect Brazil. According to estimates from the Migration Policy Institute, there were about 178,000 unauthorized immigrants from Brazil living in the US in 2019. For Brazil, managing an increase in deportees from the US can trigger heightened social tensions, put pressure on public finances, and shake political relations between the countries. The return of Brazilian immigrants to the country would increase domestic labour supply, and that would likely push real wages down and lead to some disinflation – unless onshore job creation, which has slowed in recent months, is able to catch up.
Overall, we anticipate a stronger dollar against the Brazilian currency and a steeper interest rate curve, more so with expectations of a slower pace of rate cuts from the US Fed. Opportunistic investors can take advantage of sectors that might benefit from Trump’s return, and holding US dollars as part of one’s portfolio would be greatly beneficial in the next few months. However, we believe that the greenback will see a correction once market observers realize that Trump’s largely protectionist policies are unlikely to unlock faster domestic GDP growth. The US economy will benefit from increased foreign trade, not with less of it. Meanwhile, more conservative investors can find comfort in fixed-income assets given the high interest rate environment and elevated inflation expectations.
This original article has been produced in-house for Lundgreen’s Investor Insights by on-the-ground contributors of the region. The insight provided is informed with accurate data from reliable sources and has gone through various processes to ensure that the information upholds the integrity and values of the Lundgreen’s brand.
