Low growth with rising interest rates creates an explosive trajectory for Brazil’s debt, says Campos Neto

The president of the Central Bank, Roberto Campos Neto, stated that the current fiscal weakness does not only come from noises in relation to the possible maladjustment of public accounts, but also from the market’s questioning about Brazil’s capacity for structural growth.

“The great fiscal weakness at the moment is not linked to short-term movements of improvement [das contas públicas], but what is the country’s capacity to grow,” he said at an event organized by the TCU (Court of Accounts of the Union) this Tuesday (14).

He pointed out that Brazil’s structural growth is below that of other emerging countries.

“Because in curve simulations, when I put lower growth and higher interest rates, the debt trajectory explodes,” he said.

“this award [de risco] tax is not 100% associated with short-term noise, which created a permanent expense and you have to identify the source, yes, but the question is what is the country’s capacity to grow. If the country does not grow, I will not be able to achieve fiscal sustainability”, reiterated the BC president.

He was referring to the government’s new social program, Auxílio Brasil, which replaces Bolsa Família. The market badly received the government’s move to increase spending to finance the benefit and circumvent the spending ceiling.

Campos Neto spoke again that the country paid a high price for a tax deviation that was low. “This came from the perception that something structural was happening,” he concluded.

“There was clearly a perception that important structural measures for Brazil, such as the issue of precatories and tax reform, were linked to the extension program for combating the pandemic”, he assessed.

“The way it was made [a PEC dos precatórios] to change the indexer [de correção] generated some questioning whether it is a violation of the framework or not, it is not up to the BC to say […] It is important for the government to indicate which type of fiscal framework will be used in the medium and long term”, he highlighted.

According to him, economic agents are forecasting lower growth for the coming years. “In relation to the level of GDP [Produto Interno Bruto], we’re back to 2014,” he highlighted.

In the presentation, Campos Neto showed that interest rates are rising all over the world. “This global monetary tightening has an implication for the emerging world, which is to further dry up liquidity. Remembering that Brazil needs this foreign investment to generate growth since the fiscal part is basically exhausted”, he pondered.

For the central bank, central banks found it difficult to read the situation and that is why they were unable to predict the widespread rise in global inflation and hoped that it would be temporary.

Campos Neto highlighted that Brazil is highlighted in relation to the rise in prices, but that the cores (without the food, energy and fuel shocks) are within the average of emerging countries.

“The most evil tax is inflation, it’s very important to act quickly to abort the unanchoring process [das expectativas]”, he pointed out.

Regarding exchange rates, the BC president reinforced that the regime is floating and that the monetary authority will only intervene when there is market demand for liquidity, in times of high volatility.​

He warned of the risk that an intervention greater than necessary would lead to the migration of investors who want to protect themselves to other instruments, such as long interest rates, which would generate distortions in the foreign exchange market.