The tight approval of the PEC (proposed amendment to the Constitution) of the precatório in the first round at dawn this Thursday (4) -with 312 votes, only 4 more than necessary-, lit the warning signal in the market about the difficulty of Jair Bolsonaro’s administration (no party) to accommodate the extra expenses that the president intends to create in 2022, when he is expected to seek re-election.
The result, added to the opposition’s increased resistance to concluding the vote, demonstrates that the government may adopt measures that are even more harmful to the country’s fiscal balance, according to analysts.
The Brazilian Stock Exchange retreated 2.09% on Thursday, to 103,412 points, while the dollar rose 0.33%, to R$ 5.6080. Future interest rates measured by DI contracts (Interbank Deposits) for 2023 increased by 0.3 percentage point, from 12.09% to 12.12% per year.
“The best scenario in Brazil is the least worst, which is the approval of the PEC”, says Camila Abdelmalack, chief economist at Veedha Investimentos.
The PEC authorizes the government to postpone the payment of court orders (recognized legal debts) scheduled for next year. The maneuver makes it possible to pay the Auxílio Brasil of R$ 400, without the president having to reduce spending on parliamentary amendments during the election year.
The delay in the payment of court orders is viewed with suspicion by the financial market, as it sets an uncomfortable legal precedent. The non-approval of the measure, however, is even more frightening for investors, as it can serve as a justification for the increase in expenses without counterparts.
“Without the precatório PEC, which was already priced, everything goes back to zero and the government would resort to the extension of emergency aid by provisional measure, increasing the uncertainty”, says Abdelmalack.
About two weeks ago, when the government confirmed that it intends to break the ceiling to expand the social benefit, indicators of the country’s fiscal risk perception (such as the stock market, dollar and future interest rates) worsened significantly. The crisis marked the acceleration of the rise of almost 3 percentage points in DI interest rates.
The deterioration was only slowed down after Economy Minister Paulo Guedes affirmed that he would remain in office and that the dribble in the fiscal rule would have clearly established limits. These limits, according to government signals, could also be established through the PEC of precatório.
“Today, the market’s biggest concern is the dribbling on the roof itself, as it entails a loss of credibility for the country,” says Everton Medeiros, a specialist at Valor Investimentos.
In this scenario, the tension generated by uncertainty does not reduce the negative weight that will be generated by defaulting on court orders and increased spending in the election year, according to Medeiros. “The market is also considering that the debt accumulation for the coming years could reach R$170 billion.”
According to Luciano Rostagno, chief strategist for Latin America at Banco Mizuho, the negative reaction of the market on Thursday is mainly due to the tight score with which the PEC dos Precatórios was approved the day before.
“There is a movement against the PEC, with some parties moving to try to reverse votes in favor of the reform, which creates uncertainty regarding approval in the second round in the Chamber and makes investors more cautious,” says Rostagno.
He adds that the difficulties foreseen in the political articulation make it regain strength among economic agents betting on a scenario in which the government has to follow a path via approvals of extraordinary credits to be able to increase social spending.
“From a fiscal point of view, it is an alternative that generates more uncertainty,” says the chief strategist at Mizuho.
Analysts at manager Rio Bravo point out in a report that, if approval is confirmed in the second round in the Chamber and by the Senate, it will be a relevant change in the set of rules that have ensured fiscal control in recent years.
Rio Bravo also highlights that, if the government has to pay the totality of almost R$90 billion in court orders in 2022, the emergency aid may be extended outside the spending ceiling. “With the ideas in progress, the scenario is not positive for the 2022 public accounts”, say the manager’s analysts.
“This approval resolves emergency aid in the short term, but pushes the fiscal risk into the future and will still be a matter of concern,” endorses Pedro Galdi, an analyst at Mirae Asset, in a report.
Rostagno, from Mizuho, adds that what also contributes to the fall of the Stock Exchange, and prevents a more pronounced rise in the interest rate market on Thursday, are the data released earlier by the IBGE that show a still slow recovery in industrial production.
The indicator pointed to a drop of 0.4% in production in September, compared to the previous month, slightly worse than forecasts, which pointed to a drop of 0.3%, according to a survey by the Reuters agency.
“Today’s industrial production data, added to the revision of Caged [que mostrou que o saldo de vagas formais gerado no país em 2020 foi metade do que o divulgado inicialmente], suggest that the conduct of monetary policy tends to be less bullish than the market thinks,” says André Perfeito, chief economist at Necton, in a report.
Perfect forecasts a new increase of 1.5 percentage points at the December meeting, with the Selic rate at 11.5% per year at the end of the cycle.
Also weighing on the stock exchange’s performance on Thursday was the 5.28% drop in Itaú’s shares, which earlier released its third quarter figures, when it had a profit of R$6.8 billion, up 34% on an annual basis.
In a session already marked by greater risk aversion, investors’ concerns regarding the prospects for default levels in 2022 weigh on the papers.
According to Milton Maluhy Filho, president of Itaú Unibanco, the rise in the basic interest rate should cause a slowdown in the pace of credit concession by large banks and a negative impact on defaults.
For him, the year 2022 “inspires great care” in an environment of greater political uncertainty and higher interest rates.
“When I look to 2022, it is a scenario in which we will see a worsening in default, it is expected that this will be the case [devido aos juros mais altos], and we are prepared for that from the point of view of provisioning in the balance sheet,” said the executive, during a conference call on Thursday (4) to comment on the results for the third quarter.
“Although the default [do Itaú] has increased at a slower pace than expected, tougher macroeconomic conditions could lead to even higher defaults and this combined with the reduction in the coverage ratio could result in future earnings pressure,” XP analysts said in a report.
Oil prices retreated on Thursday after a report by Saudi TV Al Arabiya said that Saudi Arabia’s oil production will soon exceed 10 million barrels a day for the first time since the start of the Covid-19 pandemic.
Brent barrel, a benchmark for the market, fell 1.09%, to R$ 81.10 (R$ 453.64).
The price of the commodity pulled down Petrobras’ preferred shares, which fell 3.17%.
Vale’s common shares retreated 1.14%. The devaluation of iron ore futures contracts (-3.89%) once again weighed on the prices of the miner, whose shares were the most traded in this trading session.
In the United States, the S&P and Nasdaq indices rose 0.42% and 0.81%, respectively. The Dow Jones fell 0.09%.
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