Election will have more weight for the Brazilian economy with an unfavorable external scenario, says Citi

The result of the 2022 presidential election will gain weight in a year in which the global economy will not help the growth of emerging countries. In this sense, the fiscal issue will be the critical point for evaluating each candidacy in Brazil.

This statement is made by the chief economist at Citi Brazil, Leonardo Porto, who presented this Friday (17) the prospects for the financial institution for the next year.

He said that a perception by the financial market that the result of the elections could be sealed from April and May would lead to an anticipation of the effects of this definition on the economy.

Porto said he thought that such an early definition of the electoral framework was unlikely, but said that uncertainty until the end of the second round postpones, for example, the effects on the asset price of the victory of a candidate committed to fiscal responsibility.

A Datafolha survey carried out from December 13th to 16th indicates that former president Luiz Inácio Lula da Silva (PT) would defeat all his opponents in an eventual runoff if the 2022 presidential election were held today.

“What matters to the market is not who will or who will not [ganhar], but rather the speech. Especially in relation to fiscal policy. This is a critical issue,” he said.

“The market will basically look at two factors. What we call ‘pay off’, the value attributed to each candidate, the quality of their economic policy from the point of view of public debt sustainability. And the probability of gain or of defeat of that candidate.”

According to the economist, if a candidate embraces the cause of fiscal responsibility, be it Lula, Jair Bolsonaro, Sergio Moro or anyone else, and gains chances of victory throughout the electoral polls, this helps in the price of assets. Among these prices, the exchange rate, projected by Citi at R$ 5.60 at the end of 2022.

He said he had many doubts about each candidate’s platform. He cited former president Lula’s stance of maintaining a more austere fiscal policy in 2003 and, in counterpoint, the government moving in the opposite direction in the Dilma Rousseff administration. He said that the same reasoning can be applied to the current president, who kept a speech in the 2018 campaign, but currently has a different stance.

As released last week, Citi revised the estimates for the expansion of GDP (Gross Domestic Product) in Brazil this year from 4.7% to 4.5% and in 2022 from 0.6% to 0.3%.

According to Leonardo Porto, this includes a practically stagnant economy in all quarters. Except in the first of 2022, when the soybean harvest should help the result of agriculture and livestock, and in the last one of next year, when some expansion is expected.

“The Brazilian economy is, at best, stagnant at the moment, if not in recession,” he said.

For him, the weakness of activity could lead the Central Bank to review the signs that it will promote a new increase in interest rates of 1.5 percentage points at the beginning of next year. Citi projects that the base rate would go from the current 9.25% to 11% per year until March, a number below the almost 12% expected by the market.

The institution also projects that inflation should drop from 10.1% at the end of this year to 4.7% next.

He said that the positive factors for inflation are an improvement in the energy issue in Brazil and the effect of the slowdown in the global economy on the prices of commodities, for example, oil. A normalization of bottlenecks in the production chain is also expected in the second half of the year.

On the other hand, he said that the points of concern come from inflationary inertia and the ability of the Central Bank to be able to anchor inflation expectations, highlighting the institution’s commitment shown so far.