The announcement of the draft of the Proposed Amendment to the Constitution (PEC) of the Transition, made this Wednesday by the vice-president-elect, Geraldo Alckmin (PSB), “was worse than expected”, wrote Morgan Stanley in a note to clients this Friday. The institution also mentioned the speech given the day before by the president-elect Luiz Inácio Lula da Silva (PT).
“Lula’s speech does not help, mentioning again that the country is paying interest to the financial markets without thinking about its own population,” the bank said, adding that the draft, which will now be discussed in Congress and is subject to change, provides for all the social assistance program outside the spending ceiling (R$ 175 billion) plus 40% of the excess revenue for 2021 (an additional R$ 22 billion) for an indefinite period.
“Not only is the value greater than that ventilated, but also the extent is worse. Furthermore, there are reports that Pérsio Arida and André Resende, two more orthodox economists on the transition team, did not participate in the discussions,” he says.
According to the bank, Andre Loes, the institution’s chief economist, calculates that the bill as it stands adds about 5 percentage points to the ratio between debt and GDP in 4 years, compared to what it had previously.
The bank further says that “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”.
The only opposition to the project, emphasizes the institution, has been the financial market. The Ibovespa fell by more than 2% this Thursday and the dollar surpassed R$5.50, reflecting, with the market reacting to Lula’s speech and the announcement of the draft.
Future interest rates also reacted negatively, with contracts for January 2025 and 2027 rising another 70 basis points today after yesterday’s high, when rates signaled the expectation that the Central Bank would not be able to start reducing the Selic rate in the middle of next year. On the contrary, it increases the chance that the Copom will raise the rate again to anticipate the effects that the lack of fiscal control will have on inflation.
“O backstop it needs to be markets. 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”, says Morgan Stanley in a note.
“The 2050 NTNb hit 7% in 2015 (it’s 6.2% now), but arguably the 10-year US real rates were at zero versus 1.4% now, so it looks like there could be more price declines. of assets, as long as the policy tests the patience of the markets.”, completes the institution.
*Posted by Ligia Tuon
Source: CNN Brasil

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