With the victory of Luiz Inacio (Lula) da Silva in the presidential elections in Brazil, the South American country has entered a new period of transition between two profoundly different ways of making economic policy — which has left the market divided between skeptics and optimists navigating the uncertainty of what the future holds for the continent’s largest nation.
The future Lula administration, which will begin in January 2023, finds a country with still high unemployment, intermittent deflation, high-interest rates, and a GDP with modest growth. And in addition to carrying the burden of the populist policies that the Bolsonaro government enacted only months before the election, it will have to accommodate a wide range of campaign promises on a tight budget.
This budget has been constrained by a federal spending cap instituted in 2016 to prevent populist measures from driving the state into irrational debt. However, the new president is currently negotiating with his allied base to pierce this spending cap, which creates even more uncertainty in a market highly concerned by the directions of fiscal policy in Brazil.
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The impact on venture capital investment
One area that has most boosted the Brazilian economy in recent years has been venture capital investments in the fintech sector. Consequently, this sector could be most impacted by the next government’s policies — and by the increase or decrease in the international credibility that it may achieve.
For Bernardo Brites, CEO of Trace Finance, a fintech that helps Latin American startups bring in funds raised abroad for local operations, tax risk is a genuine concern for venture capital investors. But in the fintech sector, there is still the possibility that this hindrance will not define the development of the industry.
“Entrepreneurship in Latin America is more difficult than in markets like the United States or Europe. So, Brazilian, Colombian, Mexican entrepreneurs, among others, already face several layers of unique complexity, from a tax, regulatory and even labor law logic,” Brites said in an interview with Fintech Nexus. “That said, I believe that the current political context, whether Bolsonaro or Lula had won [the elections] in this dichotomy of Brazil, would be almost indifferent because we have today a Brazilian context in which you have the Central Bank very pro-competition, and you have a huge advance in Open Banking, which will greatly increase the relevance of fintechs that will now have access to data points that were previously only in the hands of the big banks.”
A favorable scenario for fintechs in Brazil
According to the Inside Venture Capital report, produced by digital transformation platform Distrito, in partnership with Bexs Banco, fintechs led the ranking of venture capital investments in the first quarter of 2022 in Brazil, a period in which the amount allocated to Brazilian startups was 4% higher than the identical interval last year.
“Since 2019, we have seen an exponential increase in the volume of investments. The market has matured a lot in recent years. So I believe we have a much more favorable scenario for startups, especially for fintechs in Brazil,” said the CEO of Trace Finance.
Considering the first three months of this year, the local ecosystem totaled $2.04 billion contributed in 167 transactions against $1.96 billion distributed in 200 deals in the first quarter of last year.
Of the 2022 amount, fintechs have accumulated $1.05 billion, which represents 51.5% of the total.
According to the statement of Distrito’s CEO, Gustavo Gierun, in the report, the central aspect that has led the fintechs sector to lead the number of rounds and volume of venture capital investment raised in Brazil is the maturity of the industry.
“As much of the volume invested in technology companies happens at later stages (Series B, Series C, upwards), the startups that raise voluminous rounds of funding today have been going through a development process for some time. The financial sector was one of the first to reach this maturity”, said Gustavo Gierun in the report.
For Bernardo Brites, the high volume of investment in fintech in recent years is directly related to the high demand for financial services and the substantial capital holding registered by the sector. According to the executive, today, the Brazilian financial services market is more diluted, and the entry of new players has driven unprecedented technological development in the region.
“Some players fear a reduction of VC investment in Latin America, but if you look at the big picture, looking at the last three years, you can see that fintechs have grown three and four times in a short period,” said the CEO of Trace Finance.