Lula spoke of a conflict that does not exist, says former BC director

Luiz Fernando Figueiredo, chairman of the Board of Directors of Jive Investments and former director of the Central Bank in the FHC and Lula administrations, says he sees no problem with an increase in spending of around R$100 billion next year to guarantee social programs — since that this license to spend is accompanied by a plan to control the increase in public debt in the coming years.

For him, the speech of President-elect Luiz Inácio Lula da Silva (PT) this Thursday (10th) brought a conflict that does not exist, between social spending and fiscal responsibility, which explains the negative reaction of the market.

Figueiredo says he believes that the elected government will find a reasonable solution to the fiscal issue that will allow the country to grow 2% in 2023, well above market projections.

You participated in the transition between the FHC and Lula administrations. Would it be possible to draw a parallel with the current situation in terms of economic challenges? At the time, Brazil was doing well in terms of reforms, and the fiscal result generated future debt stability. There was still a weakness in the balance of payments, the challenge of very high inflation and a problem of rolling over the debt. It was important at that time for the government to point to fiscal responsibility. If it didn’t generate some confidence, it wouldn’t be able to roll over the public debt and it would go bankrupt.

And now? Brazil has carried out a large volume of reforms in the last six years. We have a healthy balance of payments. Inflation has already peaked and is on a gradual downward trend. I am one of those who are optimistic about growth in the coming year. The market estimates less than 1%, and I think that, if we have a reasonable fiscal situation, it could grow by 2%, despite this more challenging world.

You don’t have a debt rollover problem, the Treasury has a very robust cash position, but we have a situation of fiscal fragility and we don’t have the surplus necessary to stabilize the debt/GDP ratio. It has stabilized in recent years due to factors that will not be perpetuated. Our debt is the largest among emerging ones, it has the advantage of being financed locally, foreigners have a small part of the debt. But it’s not fun to play with.

The 2023 Budget calls for a contraction in spending next year, and the elected government is proposing changes. There is a certain consensus that the two campaigns brought about that some spending growth should happen, socially, with an extension of R$ 600 [do Auxílio Brasil]increase in the minimum wage, change in the Income Tax table, even with this tighter budget.

The point is that you can’t just do this fiscal expansion and not say what the framework will be so that, in the medium term, you can bring the debt to a more reasonable number. The two things have to be half married. For you to be allowed to spend more, you have to say how you’re going to handle it. How does it finance this shift from a fiscal deficit to a surplus to stabilize the debt.

Could it be possible to be reasonable without sacrificing campaign promises? You will not sacrifice any. It’s just not possible to say that I’m going to do everything now and I’m not going to solve the debt issue. In a worse environment, social needs will amplify. You enter a vicious cycle. We need a more reasonable situation to enter a virtuous cycle. It’s not difficult. I would say it’s easy.

It doesn’t need much. It makes a PEC around R$ 100 billion and a framework, for example, on top of the primary result. Two years from now, I will have a surplus of 2% to 2.5% of GDP. If you have a credible look at it, it’s resolved, Brazil starts to grow from 2.5% to 3%. It’s very much at hand. What people are looking for is reasonableness. If we have that, it will be a country capable of redeeming this gigantic social debt.

Could the discussion just about spending, without the financing part, be undermining the market’s confidence in the new government? What happens is that Lula came up with a speech that didn’t help. He brought a conflict that does not exist. It was still a campaign speech. In order to improve the environment, to carry out a set of social actions that really benefit, especially the most vulnerable, stability is needed.

The market is not a group of people from Faria Lima. They are investors from all over the world, we are the ones who are making our decisions, the companies, everyone.

Okay, let’s spend more now because it’s socially necessary, but won’t that solve this debt issue? The stock market is down more than 4% today [na quinta, por volta das 16h], the exchange rate is devaluing. The market reacted very negatively.

Is the problem the size of the expense or the lack of this sign of fiscal responsibility? It’s not enough to say that I was fiscally responsible back then. And now, how will it be? People aren’t saying you can’t spend anything more. They’re saying that’s fine, but there’s got to be something that’s reasonable. When you say you’re going to spend it and you don’t know what you’re going to do, you’ve created a problem. It is natural what we are seeing. The market has a doubt and it is not a small doubt.

In my view, what lies ahead is an arrangement of this vision. O [novo] government to say that it understands that we have to have debt sustainability. And then this whole set of social initiatives ends up having the effect it needs to have.

Budget are always choices. The answer to a greater need for social spending cannot always be increased spending. I give priority to those that are a priority. In my view, R$ 175 billion is too much, it may have been allocated to negotiate with Congress to reach a lower level.

This is the first important question. The second is to understand whether we will be facing a reform agenda that increases the productivity of the economy or an agenda that does not. For example, signaling the use of banks and public companies has already cost Brazilians dearly.

The doubt was less in relation to the first point. After Lula’s speech, she grew up. It was a speech that even goes against a center support base he had. Anyway, let’s see if it’s just speech. In this sense, I think a certain pragmatism will prevail. No government is elected to reduce the debt, but if it does not have a debt under control, it cannot make its agenda, may the country improve. It’s just you don’t become unsustainable. Only that.

Is that pragmatism we saw in 2003 going to be imposed again now? He goes, but that’s not what’s happening. The first signs are bad. The international environment is very challenging. In such an environment, investor patience is much less. You have to be careful. Even more having such a high debt. We saw the example of what happened in England. The government has barely entered and has already fallen.

I’m more optimistic about the growth of next year, but I’m assuming that there will be a great pragmatism in the fiscal sphere. Lula did it [quando foi presidente]🇧🇷 When Dilma didn’t do it, he was critical of her. The base of support for this government is a base beyond the left. The Congress itself is a reformist Congress. You look at all these elements. Then comes Lula’s speech, which was against it. Let’s see what actions are ahead. You have a transition group that is difficult, there are people from different backgrounds, but there is a great chance of reaching a reasonable consensus.

But the name of the finance minister is missing. In my opinion, there is a greater chance of having a minister in the most political line with good negotiation skills with Congress and a robust technical team. Next year, if this pragmatism prevails, we will be surprised with higher growth than analysts have projected. We are facing a mega opportunity. Brazil loves to miss an opportunity. Hope you don’t miss this one.

X-ray

Luiz Fernando Figueiredo, 58, economist, chairman of the Board of Directors of Jive Investments and former director of the Central Bank (1999-2003). He has worked at institutions such as Banco BBA, Banco Nacional and JP Morgan. He was a founding partner of Mauá Capital and one of the founders of Gávea Investimentos.