Lula speaks to ‘playpen’ and, if he is wrong, the crisis will come in a very short time, says José Roberto Mendonça de Barros


Economist José Roberto Mendonça de Barros, former Secretary of Economic Policy at the Ministry of Finance (1995-1998), says that Brazil has a great chance of benefiting, in 2024, from a new cycle of recovery in the world economy and prices of the commodities it exports.

“If we end this year well, even with low growth, we can move in a direction looking upwards. But, if we enter this second semester looking downwards, fearing that inflation will rise and the Central Bank will raise interest rates, then there will be no time to the government recover”.

Mendonça de Barros qualifies as “a collection of mistakes” the recent statements by President Luiz Inácio Lula da Silva (PT) questioning the autonomy of the Central Bank, the inflation target, the interest rate and fiscal responsibility.

According to him, while Minister Fernando Haddad (Finance) has been giving positive signals, Lula speaks to his left-wing “playpen”, just as Jair Bolsonaro (PL) did with supporters on the right.

In his opinion, if the Lula government makes a mistake, the negative reaction in the exchange rate and in inflation will come in a very short term.

The Transition PEC opened fiscal space of around R$170 billion, equivalent to more than 2% of GDP. Fernando Haddad [Fazenda] says he wants to restrict this spending to 1% of GDP, containing the 2023 deficit. But President Lula has been playing against expectations, questioning the autonomy of the Central Bank, the inflation target, interest rates and even fiscal responsibility. How do you evaluate the beginning of government?

If we also include the events of the 8th [de janeiro, com o ataque aos Três Poderes] in that context, it was overwhelming. It is something very worrying.

Lula’s successive speeches, which are a collection of mistakes, stem from his decision to speak to his audience. What happened to the right is happening on the left: talking to the audience. This has a bad influence on expectations. Not just the market, but everyone, here and abroad.

There are two groups of speeches. A first that wants to remake established things, such as the Social Security and labor reforms, the new sanitation framework and the privatization of Eletrobras. The second is the most recent things you mentioned, and I would also mention BNDES financing for Argentina and the single currency with Brazil.

Except for the “playpen people”, the reaction is pretty bad. But the question is: will it happen? So far there has been no movement in this direction. Instead. In case of [reajuste acima da inflação] of the minimum wage, a commission was created, and experience shows that this does not lead to a solution. Nothing was proposed in the labor law, except facing the issue of app workers, which would have to be regulated.

But the second part is relevant. It’s meant to get the audience excited, but I hope it doesn’t get a chance or anybody thinking about it. Other members of the government put hot cloths. It’s bad from an expectations point of view, but it’s not the end of the world if it doesn’t go ahead.

There is an acceptance by the Minister of Finance that the Transition PEC cannot be put into practice because, then, it would trigger a process of expansion in public spending that would lead to an increase in the debt/GDP ratio, which is the fear of all world. Now, an additional expense between BRL 80 billion or even BRL 100 billion [em 2023] it doesn’t seem unreasonable.

Many economists think so in view of the legacy left by the Bolsonaro government. Even the surplus of BRL 54.1 billion from the central government last year, the first since 2013, is seen by many as artificial, isn’t it?

Total. The numbers are, in a sense, made up. Unacceptable things have been done in recent years.

In the Precatories PEC [2021], expenses were thrown forward. There was also an acceleration of inflation. When inflation accelerates, nominal GDP rises with inflation, but nominal debt does not. Because the government auctions a fraction of the total debt each week. Even if the interest on the new debt is higher, the effect on the stock is small. It is an arithmetic result that the debt-to-GDP ratio falls. I give zero value to this, because it doesn’t tell me that there was a fiscal adjustment.

Another factor is that there was an acceleration in the prices of commodities and the collection rose a lot. This is a true but temporary effect. On top of this temporary effect, the previous government created a lot of permanent spending. There was also no readjustment in the employee payroll, and it is a matter of time before we have pressure there.

At the same time, it does not hear reforms. The one for Social Security was completed, but it was negotiated and set up before. Saying “I did Social Security reform” is false.

In the last year, several fiscal arts were made, which are what most appear in the inheritance. Since the violation of the Fiscal Responsibility Law and the electoral law, by allowing spending increases in the second half of an election year.

For whom [Lula] I would like to say that Fernando Henrique’s legacy [Cardoso] she was cursed, she got a cursed inheritance. Therefore, an additional expenditure this year of up to R$ 100 billion seems reasonable.

Since the strong recession of 2015-2016, Brazil has had very low productivity and growth and, apart from the tax reform, there seems to be no appetite for major reforms, such as administrative reforms, or privatizations. What is your expectation?

I believe the government will put energy into tax reform. It matured with the work of many people and, over time, there is a consensus that it has become indispensable to rescue the chance of having better efficiency in the activity and more productivity.

With the reform, and this was somewhat hidden, the biggest winner will be the industry, which, unfortunately, is the one that fights the least for it. Who has doubts is agribusiness, which thinks it will pay more taxes, which will not necessarily happen. But I think there is a consensus that the current tax system, based on consumption, is hopeless. Regarding other reforms, I don’t see anything relevant happening.

Regarding privatizations, I believe that concessions are more important. In this area, there is also great support from states and municipalities. But, regardless of major reforms, and if the macroeconomy does not collapse, we will also see a reasonably significant increase in investment in the area of ​​commodities, agriculture, minerals and oil.

We are accumulating in these sectors a lot of new investment linked to decarbonization and alternative energies. It will happen no matter what.

In the external scenario, the situation has been changing. The American central bank may not raise interest rates so much, the energy crisis in Europe was mild, inflation is showing signs of a truce and China has ended its Covid-zero policy. Will this not help Brazil via commodities?

On the international scene, we are in the first phase of changing the cycle, which is to aim for a drop in inflation, lower interest rates in the second half and less severe downturns in the United States and Europe. The trend points to better things, but it is essential to put the “timing” here, and a stronger recovery in demand is for 2024.

If the current government doesn’t make a mistake, Brazil is seen as a good destination for investments. If, on the macroeconomic side, minimally reasonable things are done, such as the tax reform, and that allow the Central Bank to start lowering interest rates, even at a later date, then the international scenario will start to help us. But that will take until the end of the year, beginning of the next.

But there is a minimum menu to follow. Don’t mess with the past, don’t support this bad speech, even if it’s political, have actions on the expenditure side and a set of measures in revenue that allows you to say that the deficit will not be greater than R$ 80 billion or R$ 100 billion. In addition to the new tax rule, which needs to be credible, and the tax reform. It’s no small thing.

Therefore, 2024 is the key year. Well, if we finish this year well, even with low growth, we can move in a direction looking upwards. But if we enter this second semester looking down, fearing that inflation will rise and the Central Bank will raise interest rates, then there will be no time for the government to recover.

The Central Bank’s Focus survey has been showing a rise in inflation expectations. This is a battle not yet won, even with the base interest rate at 13.75%. How do you see the scenario?

There are two prices, gasoline and residential electricity, which, due to the temporary withdrawal of taxes, count negatively. The rest, including the “core” [núcleo] of inflation, is at 9%. Food is at 11.5%. Inflation has not dropped. This is true from the point of view of those who construct the inflation index, but it is false. Because the process behind it is not a price drop. It was a most grotesque appeal that messed up the fiscal part and that is a lie from the point of view of inflation.

There are millions of families that don’t have a car, don’t work with cars and have a social energy tariff. For these people, inflation is 10%. In addition, we are opening the year with a very complicated climate issue. Between early January and last Friday (27), compared to the same period last year, rice and beans are rising 50% wholesale. With the recent rain, horticultural crops are also rising, as well as milk.

This is what the President of the Republic needs to pay more attention to. Nobody wins from inflation, not even Lula, and the situation is much worse than it appears in the 5.8% of the IPCA [de 2022].

PIS/Cofins for gasoline will have to come back. It’s one of the few things the government can do in the tax, and it’s R$ 30 billion. This will put even more pressure on inflation, which is a threat to the country. It has nothing to do with the financial market. And those who suffer are the clientele of the government itself. [os mais pobres].

The technical term for this is inflation de-anchoring. On top of that, coming to say that you have to change the goal is insanity. But, in principle, with the crop that the IBGE is projecting, in February and March there is some relief.

Is the biggest risk of discouragement then fiscal?

Exactly. If the fiscal part is set up in such a way that there are no more reasons to be afraid and that you can look two years ahead, I think inflation will drop. Gasoline and energy prices will go up and everything else will go down. If the fiscal part is minimally resolved, the dollar will also come below R$5. Basically, we have a lot of reserve [cambial] and foreign investment is pouring in.

In a more general view, we have a big problem, which is the fact that we don’t grow. To overcome this, we need to avoid disruptions in the macroeconomy and try to take advantage of the opportunity that will arise next year, coming from the international area.

For that, we need to stop this senseless speech by President Lula, which is just to talk to his playpen.

The only advantage it has is that, if it threatens to go wrong, the exchange rate and inflation will signal in a very short period of time. It will not be like the crisis under Dilma [Rousseff], in which we came out of very low inflation and the fiscal side was in order. Until she messed up, it took three years. Now, everything can be very fast.

José Roberto Mendonça de Barros, 79

Economist and former Secretary of Economic Policy at the Ministry of Finance (1995-1998), he holds a PhD in Economics from the University of São Paulo and a postdoctoral degree at the Economic Growth Center at Yale University (USA). Founder of the consultancy MB Associados, he advised the current vice-president, Geraldo Alckmin, in his candidacy for the Presidency in 2018.

You May Also Like

Recommended for you

Immediate Peak