Lula should reform with tax hikes to finance public spending, says Citi

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One of the biggest concerns of the financial market for 2023 concerns how fiscal policy will be conducted by the government that takes over the Planalto in January.

For Citi’s analysis team, however, fiscal risk should not be a major concern for financial agents in the coming year.

Analysts at the American bank believe that, although the distance in voting intentions between former President Luiz Inácio Lula da Silva (PT) and President Jair Bolsonaro (PL) should decrease over the next few weeks, the most likely scenario is a victory for the PT candidate.

In the latest Datafolha poll, carried out between the end of August and the beginning of September, the PT appears with a 13-point advantage over Bolsonaro in the first round contest (45% compared to 32% for the current president).

Considering the scenario of a third term of former President Lula, the analysts of the American bank project that the PT will have the necessary skill to conduct a responsible fiscal policy, which will not lead to an uncontrolled growth of the public debt.

“We are assuming that Lula will manage to anchor expectations about fiscal sustainability”, say Citi experts in a report published this Tuesday (6th).

Analysts expect that the former president will once again promote an increase in public spending to stimulate consumption and the local economy, but that this increase will be offset by a tax reform that will lead to an increase in the tax burden.

“Lula’s willingness to increase spending is evident, but there could also be an increase in taxes,” Citi analysts point out.

They also recognize that the replacement of the spending ceiling with another fiscal anchor is a significant risk event for the government that takes over in 2023. But they also point out that they expect the PT to adopt a more pragmatic than ideological tone in an eventual third term. , aware of the fiscal fragility of the Brazilian economy.

“We expect Lula to kill two birds with one stone by passing a large-scale tax reform that would result both in a potential GDP (Gross Domestic Product) increase, but also giving him the opportunity to raise taxes to finance the increase of expenses.”

Citi experts add that, in this scenario projected ahead, asset prices should not suffer a negative impact, with the dollar exchange rate at BRL 5.28 and BRL 5.21 at the end of 2022 and 2023, respectively, and with the process of decelerating inflation continuing throughout the coming year — the bank is working with an estimate of 4.5% inflation for the next year.

The decompression in the rise in prices, according to analysts, should allow the BC (Central Bank) to start cutting interest rates, with the Selic closing December 2023 at 10.5%, compared to the current 13.75% per year.

Credit Suisse manager signals greater caution with fiscal policy in 2023

Luciano Telo, investment director at Credit Suisse for Latin America, has a slightly more cautious view.

He assesses that investors are still waiting for the results of the elections in Brazil, precisely because of the uncertainties related to fiscal policy from 2023 onwards.

“You have to wait for the definition of who will lead next year’s policies to, in fact, be able to understand the fiscal risk that lies ahead,” Telo said in an interview with Reuters.

The market wants to understand if whoever emerges victorious will seek to contain the level of spending, according to the Executive. “This is the big discussion, regardless of the candidate who is elected,” he said.

“The election will define not only the president, but also Congress, and this election will unfold for the president of the Chamber of Deputies next year; so this configuration of forces is important to understand if there will really be a reform agenda, a broader agenda,” he added.

For Telo, with the election decided, there may be some relief in the market. But he drew attention to the need for the new team to quickly work on communication with financial agents after the result.

In other countries in Latin America, he said, the market could not clearly see a post-election guideline and asked for a discount after the election. “It’s a learning experience,” she observed.

In the case of the Brazilian stock exchange, even considering that prices are low, Telo prefers not to allocate more resources at the moment, waiting for signs about the country’s growth in 2023, in addition to doubts about the fiscal and electoral volatility.

Telo highlighted that the current discussion about the next year is about reducing the Selic, which he considers feasible from the second half of the year.

For the exchange rate, the executive said he sees the dollar in the range of R$5.10 to R$5.20 by the end of 2022, close to the current level, reflecting the terms of trade, with the appreciation of commodities, but some discount for uncertainty components.

However, he understands that clearer fiscal signals, which would mean less risk, and “behaved” commodities could take the dollar below R$5.

He considered, however, that any scenario for Brazilian financial assets involves the next steps of the Federal Reserve (US central bank). “That’s the most important thing for [determinar] risk aversion than any regional element,” said Telo.

with Reuters

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