PEC makes Bolsonaro have worse fiscal expectations than Dilma

Different indicators are beginning to show a worsening in the perception of fiscal risk in Brazil. De-anchoring the inflation target, rising dollar, falling stock markets and worsening country risk are some of them.

According to economists and political analysts, the deterioration in expectations is a reaction to the advance, in Congress, of the PEC (proposed amendment to the Constitution), which generates R$ 41 billion in exceptional spending until the end of 2022, with chances of being extended in the following years. following.

The assessment is that the measure is electoral and populist. It simulates a state of emergency to release the distribution of benefits three months before the election, in an attempt to reverse the poor performance of President Jair Bolsonaro (PL) in the race for reelection this year.

“The Brazilian government spent three years talking about a liberal model for the economy and fiscal responsibility, not to mention concern about poverty, inequality or the vulnerable. Inflation was already eating away at income and families were already running out of food, but only now, in the election , comes a PEC​that raises social spending”, says political scientist Hussein Kalout, international advisory adviser to Cebri (Brazilian Council on International Relations) and researcher at Harvard University, in the USA.

“It is a fallacy to say that the government is worrying about the poorest, the only objective of this measure, which creates a state of emergency where it does not exist, is electoral populism.”

According to Kalout, investors perceive the inconsistencies and are reacting because Brazil is not able to deliver the three basic elements for the proper functioning of the economy: credibility, stability and predictability.

Insper professor Roberto Dumas Damas points out that there is a clear indicator of this reading: the detachment between the inflation target for next year and market projections for the same period. The greater the difference, known as de-anchoring, the greater the perception of fiscal risk in the face of a worsening of public accounts.

While the Central Bank works to meet the 3.25% inflation target, the market is already projecting a 5.5% rise in prices. The unanchoring, therefore, is 69%.

“The unmooring was never so high for a later year, not even at the time of Dilma Rousseff”, says Dumas Damas.

At the worst moment of distrust regarding the fiscal future of the government of former President Dilma (PT), between February and March 2016, the disanchor was at 33%. At the time, the inflation target was 4.5% for the following year, against a projection that reached 6%.

The PEC has already been approved in the Senate and has a troubled process in the Chamber. On Tuesday night (5), the pressure to speed up the proceedings in the special commission ended in a row.

The package provides for the release of R$ 26 billion for the temporary expansion of R$ 200 in Auxílio Brasil and the granting of benefits to those who are in the queue. Releases a voucher worth R$1,000 for self-employed truck drivers, at a cost of another R$5.4 billion.

It also provides R$3.8 billion to subsidize ethanol and another R$2.5 billion to help states pay for public transport for the elderly. It provides for assistance for taxi drivers (R$ 2 billion), an increase in the value of the Gas Aid (R$ 1 billion) and a budget increase for the Alimenta Brasil program (R$ 500 million). The measures would be valid until the end of the year.

“With this PEC, they are setting a bomb for the next government”, says the Insper professor. “A good part of the goodness of the PEC ends on December 31, but how will the president-elect, whether Lula or Bolsonaro, say: remember those R$200, from the truck driver valley, from the gas valley? So, there will be no more. very hard to believe that. A lot of things are going to be permanent.”

This Wednesday (6), the dollar and the stock market, short-term indicators of investor sentiment, remained under pressure. The dollar rose 0.64% to R$5.42. The recurring rise in the dollar has the side effect of worsening the scenario for inflation.

The stock market closed still below 100,000 points. However, it turned in the last hour of trading, up 0.43% thanks to the minutes of the Fed, the US central bank, which moderated the pessimism of investors.

Currency and equity markets have strongly reflected fears of a downturn in the global economy and expectations of higher interest rates in the US. However, the reading of economists in Brazil is that the Legislature and Executive, by releasing electoral spending, are contributing to the worsening of national financial indicators.

“It is difficult to separate the effects, but, using the language of economists, I would say that it is reasonable to assume that part of this pessimism in the local market is related to the worsening fiscal situation in Brazil”, says Daniel Couri, director of the IFI (Institution Independent), body linked to the Senate.

In a preliminary report on the PEC, released this Wednesday, the IFI questions the proposal.

“The PEC lacks estimates and studies that support the proposed value”, says the text. “To get an idea of ​​the importance of the measure, in fiscal terms, Auxílio Brasil would cost 1.5% of GDP, in annualized terms, more than three times the historical average of the former Bolsa Família.”

Couri has no doubts that the package “increases the risk to public accounts in the medium term and signals a lack of commitment to fiscal discipline.”

Another indicator that continues to deteriorate is the country risk measured by the CDS, the Credit Default Swap, a type of contract that protects against credit default.

Five-year CDS contracts are currently quoted at 303.9 points, the highest since the 309 points recorded on May 25, 2020, when the perception of default risk grew at the beginning of the pandemic.

Collaborated with Clayton Castelani