Companies lose BRL 670 billion during debate over court orders and hole in spending ceiling

The good mood of the domestic market demonstrated with the approval of the PEC (Proposal for Amendment to the Constitution) by the Senate came only in the final stretch of discussions on the project that postpones the payment of judicial debts by the government and allows a dribble in the ceiling rule of spending.

Over most of the nearly five months of debates on the subject in Brasília, companies on the Ibovespa, the reference index of the Brazilian Stock Exchange, lost more than R$ 670 billion in market value, according to a survey by Rio Bravo.

The loss comprises the 18.7% drop accumulated by the Ibovespa between July 29, the beginning of the debate on changes in the calculation of court orders, until November 22, when doubts about the approval of the text by the Senate still caused fluctuations in the Stock Exchange.

External factors, such as global inflation and the fear of a resurgence of the Covid-19 pandemic, also contributed to fluctuations that scared away investors — therefore, the losses cannot be exclusively attributed to the discussion about the PEC of the Precatório.

Since the subject entered the market’s radar, however, Brazilian stocks have started a trend of falling apart from emerging economies indices which, like Brazil, are subject to global pressures, showing a cross between the evolution of the Ibovespa and a basket of exchanges comprising the main indices of Mexico, Chile, China (Hong Kong), India, Russia and Turkey, conducted by economist João Leal and analyst Leon Abdalla, both from Rio Bravo.

“Assessing the impact of the PEC of Precatório on the Exchange is a difficult exercise, but comparing the performance of the Ibovespa with a basket of Exchanges from emerging countries, we get an idea of ​​the impact of domestic factors”, reported the specialists.

While the Brazilian stock market fell by almost 19% in the period, the basket with other emerging markets rose 7.2%. In the same period, the S&P 500, the reference index of the American market, advanced 6%.

The detachment between Brazil and its peers increased even more after the announcement of the proposed change in the capping rule, on October 18, shows the analysts’ chart, which also reveals a slight disadvantage of Brazilian stocks throughout 2020.

According to Leal and Abdalla, the local market was reacting at that time to the worst moment of the Covid-19 pandemic in Brazil.

Rio Bravo also compared the advance of the CDS, which stands for a country’s default risk, between Brazil and its main peers between July 29 and November 29.

Brazil’s five-year CDS worsened 50% over the period, while South Africa, Mexico and Turkey’s risks rose 23%, 25% and 34%, respectively.

“It’s easy to see how much Brazil’s risk perception has shifted from its peers due to domestic issues,” the experts reported. “This further shows the size of the impact that fiscal issues have had on the perception of the national economy.”

The government’s intended change represented, for most of the time it was discussed, an attempt to increase spending through the breach of a commitment.

But, after President Jair Bolsonaro’s decision to impose an increase in Brazil Aid, forcing the economic team to break the spending ceiling, the market started to assess the delay in the payment of judicial debts of the Union foreseen for 2022 through the PEC of the Precatório as a possibility to prevent the government from increasing expenditures without counterparts.

Since the approval of the PEC by the Senate, on December 2, the Stock Exchange has risen 3.15%. This does not mean that the recovery will be continuous and, even less, that the requested level from July will be reached again in the short term.

The crisis triggered by the discussion on precatories and Brazil Aid has already placed the country in a new condition of fiscal and inflationary risk and, although the issues are temporarily resolved, it is difficult to say how the market will absorb this new level of risk, they say Rio Bravo experts.

Furthermore, the timing for recovery is unfavorable. While the domestic market sank, most of the world exchanges advanced due to the increase in liquidity provided by economic stimulus measures created during the pandemic.

Withdrawals of restrictive measures due to the advance of vaccination in the world stimulated consumption before the normalization of supply chains, generating shortages of inputs and global inflation.

Central banks are now discussing the pace of withdrawing economic stimulus and raising interest rates to combat rising prices.

“We are now in a much more contractionary scenario in terms of interest rates than before the start of these discussions, reflecting directly on the cost of capital of companies. It is not possible to predict when and if the Exchange will return to the level before the discussion.”