Fiscal risk leads Bolsonaro government to pay higher interest since Dilma

The increase in fiscal risk has led the Jair Bolsonaro (PL) government to pay the highest interest rates on the issuance of new public debt bonds since the end of the Dilma Rousseff (PT) government, removed from office in May 2016 in an impeachment process. .

The turmoil comes in the wake of the vote on the PEC (proposed amendment to the Constitution) on goodness, which allows the Chief Executive to break the spending ceiling and circumvent electoral legislation to open public coffers less than three months before the elections.

Bolsonaro is in second place in the polls, behind former president Luiz Inácio do Lula da Silva (PT), and sees the package of benefits as a platform to boost his campaign.

The Treasury carries out periodic auctions for the issuance of public debt securities. The objective is to obtain resources to finance their financial needs in exchange for remuneration for investors, ranging from large national or foreign funds to small savers who invest as individuals.

An increase in the cost of debt will be reflected in the effort that future governments will need to make to meet the bill for these obligations.

In recent days, rates that reward these investors have broken through levels only seen previously in 2016.

The 10-year NTN-Fs (National Treasury Notes – Series F), remunerated at a fixed rate, were issued with interest of 13.21% in the auction on July 7th. The rate is the highest since April 7, 2016 (when it stood at 14.2499%) — on the eve of Dilma’s removal.

The current cost of this bond is more than double the 6.51% promised by the National Treasury to be financed at the end of October 2019, amidst the approval of the Social Security reform in the National Congress.

Fixed rate bonds are generally preferred by foreigners, but Brazilian investors also purchase the paper.

In this modality, there is no automatic update by any index, such as inflation or the Selic rate. Buyers build into the calculation of how much to charge the Treasury their own expectations of price developments — thus, they avoid losing money.

Although current inflation is above 11% in 12 months and is expected to remain high in 2023, projections for 2024 onwards are for convergence to the inflation target of 3% per year. Therefore, the movement of interest rates on bonds is attributed to the worsening of risk perception by investors, who charge more to finance the government.

The deterioration is also seen in the 40-year NTN-Bs (National Treasury Notes – Series B), the longest-term bond issued by the government. In this category, the investor receives the variation of inflation in the period, plus a portion of real interest.

This real rate stood at 6.17% in the July 5th auction, a level similar to that seen in the December 6, 2016 auction (6.178%) and higher since April 26, 2016 (6.25%). The cost also doubled in relation to what was observed shortly after the approval of the Social Security reform.

The increase in the cost of public debt contributes to worsening the situation of the country’s accounts. Since 2014 Brazil has lived with primary deficits, that is, revenues from taxes and other sources of collection do not even cover spending on benefits, salaries, funding and investments.

To cover the hole, the country issues bonds, paying interest to investors. And to honor debts created in the past and that are close to maturity, the government also issues new papers, in an operation called debt rollover.

If the rollover is done at a higher cost, this will be reflected in the size of the future effort to honor these payments. The federal public debt totaled BRL 5.6 trillion in May, and the average cost of this entire stock was 9.86% per year, the highest since November 2018.

The economist at ASA Investments and former Secretary of the National Treasury, Jeferson Bittencourt, says that the chain of fiscal maneuvers, in the midst of a scenario of great uncertainty, brings a greater cost of credibility. “Each easing of fiscal rules has a higher marginal cost in terms of image, because it migrates to a more risky area of ​​the ability to maintain credibility in debt solvency”, he says.

According to him, the trajectory of fiscal variables is always worrying in a country like Brazil, which has a debt level of 78.3% of GDP up to April, high compared to other emerging economies (just over 60% of GDP in average), in addition to a high cost of debt.

The election period is another factor that brings volatility, according to the economist, in addition to a very contractionary cycle of hikes in basic interest rates – the biggest and most intense since the adoption of the inflation targeting regime. All this in the midst of a global inflationary scenario, fear of recession and more aggressive interest rate shocks in the international scenario.

“These ingredients are enough to generate a lot of concern regarding the fiscal framework and demand a lot of commitment from the authorities with the conduct of fiscal policy from now on”, he says.

“To culminate, the icing on the cake, we have fiscal measures that are being taken at the moment with the aim of tackling the effects of inflation on the economy, but which, in a way, end up sustaining activity, strengthening consumption, and some of them even distorting the price mechanism”, he continues.

Some of the measures are temporary, including the reduction of federal taxes, so that their reversal will end up putting pressure on next year’s inflation. In view of this, the Central Bank signaled at the last meeting of the Copom (Monetary Policy Committee) its intention to keep the basic interest rate at a high level for longer. Today, the Selic is set at 13.25% per year.

According to Bittencourt, in a scenario of a longer monetary tightening cycle, the government has no alternative but to refinance itself at a new higher level of interest rates, raising the cost of public debt in the long run.

“If the scenario deteriorated so that the Central Bank had to raise the Selic one percentage point above what is expected, this would lead to 0.7 percentage point of GDP more debt at the end of 2023. The debt would be R$ 75 billion more than expected”, he says.

For Juliana Damasceno, economist at Tendências Consultoria, the expectation is that the cost of debt will worsen.

“We don’t have a positive perspective, even in a scenario where we have been reaping positive fiscal flows, let alone in a scenario where we have such negative perspectives. We have challenges on the macroeconomic side, exchange rate issues, foreign policy “, he says.

The economist also cites revenue waiver measures with tax cuts and the reflexes of the PEC of goodness.

For Damasceno, the deterioration of fiscal risk gains more strength now because the Bolsonaro government tries to circumvent the spending ceiling for the second time in six months after the PEC dos Precatórios, which postponed the payment of judicial debts and changed the way in which the ceiling was calculated. expenses to open a space of R$ 115 billion in expenses. Now, the new bill is R$ 41.25 billion.

“We are doing this to cover expenses that are clearly electoral. If it wasn’t, it wouldn’t be dated to end on December 31”, he adds.

The economist also recalls that, when the MP (provisional measure) of Auxílio Brasil was being processed in the Senate, the section that decreed the end of the program’s queue was vetoed.

“It is a very timely and electoral discussion that leaves a dangerous legacy. The way in which fiscal policy is being conducted hinders monetary policy a lot, either because of this issue of risk, or because of the uncertainties that are generated, or because of the question of demand itself. aggregate.”