The tension caused by the government Jair Bolsonaro In the financial market with a change in the spending cap base It should undermine the already slow growth of the Brazilian economy.
Investors have reacted poorly to the government’s move to change the country’s main financial pillar with the goal of supporting Auxelio Brazil in 2022, the year of the presidential election. This tension was evident in the financial markets. In the accumulation of the week, The dollar rose 3.22%.And While the stock market declined by 7.28%..
“We have a lost market. There is great uncertainty about the future of economic policy management,” says Elisa Machado, an economist at ARX Investimentos.
According to analysts, the decline in activity should be reflected, above all, in the coming year. The scenario is very sensitive indeed. In the Focus report, prepared by the central bank, GDP forecasts for 2022 have fallen since July – with a portion of banks and advisory firms already forecasting less than 1% growth.
Next year’s economic growth will be affected by a very harmful combination known to Brazilians: the financial downturn increases investors’ perception of risks to the Brazilian economy and Causes real devaluation.
The devaluation of the Brazilian currency means more inflation, and it forces central bank To increase the base interest rate (CELEC) to contain the price hike. High interest rates prevent company investments and families’ consumption.
“We were already very concerned about next year’s scenario, and weeks ago, we changed our 2022 growth forecast to a low 0.4%. The combination of inflation and interest rates combined with the political and financial crisis set the tone for this deterioration,” says the chief economist at MB Associados, a consultancy. Sergio Vale.
“For now, we keep our forecast at 0.4%, but the market is likely to make further revisions to the growth scenario in the coming weeks,” he says.
See below the reasons why the Brazilian economy would grow less:
1. Deterioration of public accounts
What has worsened the economic outlook is the Bolsonaro government’s move Exceeding the spending cap With the aim of supporting Oxillo of Brazil.
The government plans to change the ceiling with two maneuvers:
- change the ceiling correction period to coincide with the expense correction period;
- And reduce the amount to be paid by court orders in 2022.
If the changes continue, the government should have a respite of R$84 billion to spend next year. But congressional technicians estimate that this budget space may be larger and exceed R$95 billion.
Understand the change in the PEC of Precatório and the impact on the spending cap
The spending cap was created under the direction of Michel Temer, and he is trying to solve a structural problem in the country’s public accounts. Since 2014, Brazil does not register primary surplusThat is, there is no money left after paying the expenses to pay the interest on the government debt.
As a result, Brazil’s indebtedness to the emerging economy is high and is now being closely watched by investors.
Spending cap explosion led Tendências Consulting to work with it A pessimistic scenario for the Brazilian economy. Projected 1.8% GDP growth for 2022 gave way to a figure closer to 1%.
“When we think about growth, the effects are really bad at the end of this year, but for 2022 in particular,” says Alessandra Ribeiro, an economist and partner at Tendências Consulting.
“This increase in uncertainty observed in financial assets has an immediate impact as the deterioration in confidence hits interest and credit. And all of this is already starting to influence consumption and investment decisions in this latter part of 2021. But it is a movement that should remain stronger in 2022.”
In the pessimistic scenario of consulting firm Tendências, an increase in investor uncertainty about the Brazilian economy should lead to a new round of devaluation of the real, causing the exchange rate to close this year at R$5.80. In 2022, it should go to R$ 6.20.
“If the country enters into a scenario of expanding public spending, without the necessary reforms that would be able to benefit the economy over time, we will again question the sustainability of public accounts,” says Alessandra.
The rial was already accumulating a devaluation process due to the financial uncertainty and political crisis caused by President Bolsonaro in recent months.
The spent riyal has a direct impact on inflation.
Today, Brazil is dealing with a very difficult inflation scenario. In the 12 months to September, The National Consumer Price Index (IPCA) reached 10.25%.. It was the highest empty rate since February 2016.
Inflation in Brazil in 2021 will be higher than 83% of countries
In a recent Focus report, consulting analysts forecast inflation of 8.69% for this year and 4.18% for 2022. But those forecasts tend to get worse.
“Yes, there may be a deterioration in the exchange rate depreciation, and therefore in inflation and interest rates, however, growth is even lower,” says Fall.
As inflation escalates, the central bank will be forced to increase the base interest rate, Currently at 6.25%.
Higher interest rates make investment for businesses and consumption more expensive for families, hampering economic growth.
BC raises interest rates to 6.25% annually in an effort to contain inflation
“We are working with the hypothesis that the central bank will accelerate rate hikes at the next meeting to 1.25 percentage points,” says Elisa, from ARX Investimentos.
By the end of this year, it estimated that Selleck should reach 8.75% annually, rising to 10.5% in 2022.
“Obviously we have seen a change in the financial system, and monetary policy has to adapt to that,” Elisa says. “If the BC does not adjust monetary policy, what we will see, in addition to the current higher inflation due to the exchange rate, is a process of dampening expectations.”
5. Deterioration of the external scenario
In addition to all the domestic challenges, Brazil faces a very ambiguous external scenario.
The Federal Reserve may raise interest rates earlier than expected – Photo: Chris Watty/Reuters
In advanced economies, inflation is also continuing, which could cause the world’s major central banks to raise interest rates earlier than expected. With the damage caused by the epidemic, monetary authorities in many countries have lowered interest rates to stimulate the economy.
High interest rates in advanced economies have the potential to attract money invested in emerging markets, such as Brazil.
“The major central banks are concerned with persistent inflation, and the risk of this movement will spoil the outlook,” says Alessandra, of Tendencias. “There is a more challenging environment out there and this rate hike can be expected.”
In reading it, the Fed may raise interest rates – Today in the range between 0% and 0.25% – In the middle of next year. The market expects that this will not happen until the end of 2022.
China’s economy grew 4.9% in the third quarter compared to last year
This week, a new sign of the deterioration of the international environment: China reported that GDP grew 4.9% in the third quarter of 2021 – The slowest pace in a year. The country’s performance has been hampered by the energy crisis, supply chain disruptions, worsening debt in the real estate sector and intermittent outbreaks of the Corona virus.
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