Economists consulted by the CNN Brazil Business evaluated the speeches of the president-elect, Luiz Inácio Lula da Silva, this Thursday (17), as dangerous for the future of the Brazilian economy.
Lula again criticized the spending ceiling at COP27, in Sharm el-Sheik, Egypt, in a speech to representatives of social movements. The day after the draft of the PEC was handed over to Congress by the Explosion team, Lula stated that “it is no use thinking only about fiscal responsibility” and stated that when talking about a spending ceiling, money is taken “from health, education and of culture”.
According to the director of Wagner Investimentos, José Faria Jr., in his campaign, Lula never presented any economic project and at no time did he consider mentioning a name to the Minister of Finance, in addition to always taking a position against the spending ceiling. “All the speeches of the president-elect, before and after the elections, were never linked to fiscal responsibility”, he evaluates.
The economist explains that, with the proposals presented in the draft of the PEC, the debt trajectory will become impossible to be paid. According to him, analysts forecast a rise of 20 percentage points in the Brazilian debt in four years, making it difficult to finance. “The way out will be to charge higher interest rates. Brazil is a country with a low investment grade and is at risk of taking a new downgrade, as the global market did not expect so much spending”, he says.
An XP survey released this week calculates that removing R$ 175 billion from the scope of the constitutional spending ceiling could take the Brazilian gross debt from the current 76% to up to 97.5% of GDP (Gross Domestic Product).
This more negative scenario for the Brazilian economy, as evaluated by Faria Jr., was already outlined before the R$ 198 billion foreseen by the PEC. “Now it has become more sensitive, as the proposal is that this expense be permanent”, he warns.
Faria Jr. assesses that, if interest rates rise, consequently, company projects are worse, dividend distribution falls, financial expenses rise and other companies lose interest in investing in the country. “It is these causes that make the dollar rise so much, and that is what the country is seeing now,” he points out.
For him, there are still many doubts about what will be approved, but both Arthur Lira, president of the Chamber of Deputies, and Rodrigo Pacheco, president of the Senate, are showing signs that they want the “Bolsa Família” off the roof in 2023. ” This is already a dangerous attitude, because any concession that is made will not back down. The ideal would be to follow the idea of the current Minister of the Civil House, Ciro Nogueira, in which he suggests an overflow of the ceiling by R$ 80 billion ”, he highlights.
However, the economist points out that none of the powers is signaling that the PEC can be approved differently from the one proposed. “This will create insecurity in the market. If Congress approves this proposal for a four-year period this year, the deputies who take office next year will lose their legitimacy. That is, an indebted government needs to have credibility, and what we have seen is the opposite, with increased uncertainty, ”he points out.
In a recent interview with CNN, José Márcio Camargo, chief economist at Genial Investimento, said that a social spending plan that does not consider fiscal responsibility would probably lead Brazil to a recession.
“The fundamental point here is that Brazil is emerging. (Increasing the debt) would generate an increase in the fiscal cost, an increase in the interest demanded by investors to finance this debt and, consequently, an increase in the interest rate, exchange rate devaluation, inflation and, most likely, a very strong recession”, he said.
Fiscal responsibility X social responsibility
In the view of the former director of the Central Bank and partner of Mauá Capital, Luiz Fernando Figueiredo, treating fiscal responsibility and social responsibility in an incompatible way is Lula’s main mistake. “Stability is a prerequisite for having a good environment in which the country can grow and meet its needs, that is, without it, nothing happens. In an unstable environment, inflation is high, and the poorest population suffers the most,” he says.
The draft that foresees, in addition to the R$ 175 million outside the spending ceiling, another R$ 22 billion for future investments, Figueiredo classifies it as a “disaster”. For him, what is being proposed is a new fiscal framework. “Without a specified period it is not a waiverwhich is a temporary license to spend”, he points out.
What was imagined, according to Figueiredo, was that this overflow would not exceed R$ 100 billion and would have a determined period, which would be for one year. “This inflated proposal bothers the market and opens the possibility for Congress to negotiate with the government in the coming years”, he bets.
market reaction
The market reacted negatively to Lula’s speeches and the draft released the day before. The Ibovespa spent most of the morning down more than 2%, while the dollar surpassed R$5.50. Future interest rates, on the other hand, surpassed the worst period of the Bolsonaro government, breaking a record.
In a note to clients on Thursday, Morgan Stanley said the market has been the only opposition to the proposed full-size overflow project. “The lack of strong opposition to the bill is alarming. There is not a single parliamentarian banging the table trying to oppose it, other than maybe Ciro Nogueira at the weekend claiming that ‘there needs to be discussions’, which is arguably soft”.
“It’s no surprise that the market basically erased any interest rate cuts from the curve and is now adding some hikes. Roberto Campos, president of the BCB, has been saying that the tax is crucial for the cycle of easing and we are seeing the exact opposite of fiscal discipline. The movement in the rate curve is impressive”, wrote the institution.
Source: CNN Brasil
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