Opinion – Solange Srour: The external constraint is approaching

After a long period of belittling the resilience of inflation, the world’s most important central banks have finally started to react. The Fed accelerated the pace of rate hikes from 0.50 to 0.75 percentage points, acknowledging that avoiding a recession will be an uphill task. Switzerland’s central bank raised rates for the first time since 2007, as the ECB prepares to help eurozone countries that will struggle to borrow in the face of dwindling liquidity.

Rising interest rates in developed countries is, in general, bad news for emerging economies, being associated with a strong increase in the cost of their debts from a greater aversion to risk.

The financial repercussions of a monetary tightening in the US for emerging markets depend on two key factors. The first of these is its intensity. The second is domestic conditions in emerging markets themselves: countries with greater vulnerabilities tend to be more sensitive to a given rise in US rates.

At the beginning of the year, there was a consensus that the rise in US interest rates would not lead to greater risk aversion, as inflation tended to be temporary. However, after inflation surprised for more than a year, with US unemployment near the lowest level in history since the 1970s, the perception has changed – it will be necessary to bring US interest rates to a more restrictive level.

How does Brazil present itself in this scenario? A good way is to compare the current moment with the last cycle of tightening of American interest rates, which began in September 2015.

After growing 0.5% in 2014, Brazil entered a recession in the second half of 2015, starting what would be the worst recession in our history. Over the course of 2015 and 2016, GDP declined by 6.7%, and unemployment rose by 4.7 percentage points, reaching 11.5% at the end of 2016. Today, growth is close to potential, and the job market is recovers vigorously, with the unemployment rate heading below double digits.

Another positive point is our external accounts. In 2015, the current account deficit was 3.1% of GDP, and by the end of this year it should be 0.4% of GDP. The ratio of the price of exports to that of imports is now 20% higher than in September 2015.

On the other hand, in relation to inflation, there is nothing to celebrate. In September 2015, the IPCA accumulated in 12 months was 9.5%. Today we have an accumulated inflation of 11.7%, more widespread and with higher cores. Many people still think that the situation was more serious in 2015, as Brazil behaved like an outlier in a world that discussed “secular stagnation”. Unfortunately, there is no relief in being in an inflationary global environment, quite the opposite.

From a fiscal point of view, we remain fragile. Since 2015, public debt has increased by 13 percentage points of GDP and has a worse profile (it is shorter and more Selic-indexed). It is a fact that the spending ceiling survives; and, therefore, expenses in relation to GDP closed 2021 at the lowest level since 2017. But the big problem is that the ceiling is seen as subject to change. First for the creation of Auxílio Brasil and now for the discussion of gas vouchers, truck driver aid, among other initiatives, which generates enormous pressure for its complete extinction in 2023.

The Central Bank signals that it will be necessary to have higher interest rates than the current 13.25% for a long time to bring inflation closer to the target, which, together with lower world growth and uncertainties about fiscal rules, will cause our GDP to slow down. . With developed central banks turning off the liquidity tap, the real is likely to depreciate, putting further pressure on inflation and interest rates. If commodities fall, GDP will decelerate even further with repercussions on revenues that have helped our fiscal result so much. The risk of the Brazilian economy entering a recession in 2023 is not low.

The combination of high debt, high real interest rates and a strong economic slowdown will bring the discussion about fiscal dominance, that is, about the inability of the Central Bank to raise interest rates in an undeniable way without causing a worsening in the debt trajectory.

Everything indicates that the markets’ patience with the lack of visibility for 2023 tends to end. It may even be that whoever is in the president’s chair will do some initial tidying up next year. However, the external scenario will be an important constraint and will demand robust actions and political strength, far beyond pragmatism.