Disputing the result would increase electoral stress in the market, says economist

The government’s package of economic “kindnesses” put President Jair Bolsonaro (PL) back in the electoral game and made the dispute more fierce, which raises the risk of contesting the result of the vote and an institutional crisis, with repercussions on the financial market. This is the assessment of Luis Otavio de Souza Leal, chief economist at Banco Alfa.

“The great impact of this intensification, of the increase in the competitiveness of the Bolsonaro candidacy until the second round, we will see in the assets [como Bolsa e dólar]. It is not a question of what is best for the market, Lula or Bolsonaro. It is much more the probability of an institutional crisis”, says the economist.

For him, the constitutional amendment that authorized the federal government to burst the spending ceiling by R$ 41 billion removes the risk of a recession in Brazil in 2022, but the increase in demand will require high interest rates for longer, which harms the economy. growth in 2023.

See the main excerpts from the interview.

In a report to clients, you state that the PEC of the benefits can be decisive for the results in the coming months, both in the economic and political fields. What is the impact on the Brazilian economy in the second half of this year?

You will have a much stronger third trimester than you were expecting before. Until some time ago, it was commonplace in the market to say that GDP in the second half of the year would be negative, even with two negative quarters, generating a technical recession. That’s changing. Our forecast for the third quarter went from a drop of 0.10% of GDP to a rise of 0.20%, and with an upward bias. For 2022, we went from 1.7% to 2%. And 2% is floor.

We have been discussing the fiscal issue: there are R$ 41 billion more in spending. The counterpart of this is R$ 41 billion for consumption. A good part will go to an income range that is consumption in the vein. Even if the person initially uses the money to reduce indebtedness, he will use this space to get into debt again.

What is the impact of this growth on inflation and on GDP in 2023?

More consumption means stronger demand, which makes it harder to reduce inflation. There are some interest rate projections pointing out that, instead of stopping at 13.75%, the Central Bank will have to end [de subir a Selic] in 14.5%, something like that. I think it will stop at 13.75%, but this more heated demand will make him have to leave interest rates high for longer. In this sense, you may have a reduction in GDP next year. We are 0.5% up, with a downside bias.

Two things sustained growth this year, the external sector and the measures taken by the government. Neither of them will be present next year. So where would the growth come from? And the average interest rate will be higher than in 2022. When you put all that together, it’s hard to be optimistic about growth next year.

You say that the PEC can be a watershed in our bets for the electoral result, and that the more fierce the dispute, the greater the chance of contestation of the result. What is the impact of this on the economy?

The great impact of this intensification, from the increase in the competitiveness of the Bolsonaro candidacy until the second round, we will see in the assets [como Bolsa e dólar]. It is not a question of what is best for the market, Lula or Bolsonaro. An institutional crisis is much more likely. The possibility that Bolsonaro, if he is defeated, will not accept the result. The fiercer the campaign and the closer to the elections, the more this discussion will arise.

Although you say that an institutional crisis is not your most likely scenario, you say that the mere chance that this will occur will be reflected in the price of Brazilian assets. What would the impact be?

I give an example. Let’s say you assign a 10% probability of this happening. So you have to put a 10% premium on top of the assets. We would be talking about a dollar close to R$5.90 and a stock exchange close to 90 thousand points.

Most of the upward movement of the dollar that we have seen recently has to do with the issue of monetary policy in the US, it was the global strengthening of the dollar. One part was the worsening of fiscal perception because of the PEC. The electoral issue, whether or not there may be an institutional problem, has not yet entered the price. I think the market can start to incorporate some of that from the 7th of September. The 7th of September will be a good challenge for this scenario.

What is the manager’s stance in the face of this instability during the election period and with a possible lull afterwards?

If you don’t think there’s going to be an institutional crisis stricto sensu, regardless of who wins, Brazil won’t end. Considering that the country will not end after the elections, what will happen is that whoever buys Brazil when the dollar is at R$ 6, the Stock Exchange below 90 thousand points, will win when this premium is withdrawn. The Brazilian electoral cycle has always been marked by this back-and-forth: the market gets nervous on the eve of elections and then returns everything when the government starts. Especially when there are these uncertainties that we have now. I don’t think it will be any different this time. For the manager or individual investor, it is a time of opportunity.

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Luis Otavio de Souza Leal, chief economist at Banco Alfa. Bachelor and Master in Economics from PUC-RJ, where he worked as a professor. He was chief economist at institutions such as Banco ABC Brasil, Pictet and Fecomércio-RJ.