Brazil under Lula goes against the grain of a new global mood

New global indicators show that Brazil is going against the grain of the main economies that have faced inflationary and structural problems in recent years.

While the United States, the Eurozone, Japan and emerging countries like India project a slowdown in prices in 2023 (or stability, like China) without a bigger shock in interest rates, forecasts in Brazil have systematically worsened.

Brazil has the highest interest rate among these countries to try to slow down the economy and quell the escalation of prices. There are 13.75% interest per year, almost 8 percentage points above inflation.

Even so, inflationary pressures in Brazil remain firm. And they should increase when the government increases taxes on gasoline and alcohol. The return of taxation was postponed until the end of February and is part of the fiscal adjustment package that Minister Fernando Haddad (Finance) presented to tackle the fiscal imbalance, hoping to raise R$ 29 billion with the reencumbrance.

For specialists, while the international scenario has changed for the better, indicating a more promising future, the Brazilian government still has not convinced businessmen and market agents about how it will control the expansion of spending and its public debt.

The result has been insecurity between companies and the market; and more pressure on inflation —in an environment aggravated by speeches by President Luiz Inácio Lula da Silva (PT) against high interest rates, the inflation target, Central Bank autonomy, and fiscal responsibility.

In the largest share of Lula’s voters, the poorest, inflation is the main threat to the erosion of the president’s popularity. They do not have protection mechanisms for the richest, such as interest-indexed investments, and spend most of their income on food. In 12 months, with official inflation at 5.9%, food prices rose 11.5%.

Last week, the chief economist of the IMF (International Monetary Fund), Pierre-Olivier Gourinchas, stated that 2023 should represent the “turning point” for many countries and revised upwards the growth estimates in relation to last October (except for the UK).

The Fund predicts that around 84% of countries will have lower inflation compared to 2022, which would reduce the pressure for their central banks to raise interest rates, depressing economies.

Also last week, the US and the euro zone announced increases of 0.25 and 0.5 percentage points in their basic interest rates. Raising them, respectively, to 4.75% and 3% per year.

According to José Júlio Senna, former director of the Central Bank and head of the Center for Monetary Studies at Ibre-FGV, as the expectation for US inflation is 3.4% this year (Bloomberg consensus), the US will be operating with interest rates above inflation. In the European case, Bloomberg projects inflation of 5.9% (against interest now at 3%).

“With demand inflation and a heated job market, the US already has interest rates in contractionary territory. In Europe, around 43% of inflation comes from supply shocks, such as energy and food, hence the tightening of interest rates does not it will be so severe. But, in both cases, new moderate highs can be expected”, says Senna, also an associate consultant at MCM.

Real interest (above inflation) slightly positive in the US and still negative in Europe —two regions with declining inflation— contrasts with the Brazilian situation of real rates close to 8% a year and prices under pressure.

Seven weeks ago, the inflation estimate for 2023 rose in the Central Bank’s Focus survey. On the second pass (30), it reached 5.74% —practically the same level as the IPCA closed in 2022 (5.79%). Some banks and consultancies are already projecting 6.5%.

“Almost all of the Lula government’s fiscal adjustment plan involves increasing revenue, which ends up having inflationary impacts, and not cutting spending. from the Treasury paying between 6% and 6.5% a year, plus inflation. How long can the country tolerate something like this?”, asks Senna.

According to economist Affonso Celso Pastore, from AC Pastore & Associados and former president of the Central Bank, the Brazilian public debt has an average term of four years, which requires rolling over about 25% of it each year with the sale of new securities on the market —which today pay extremely high real interest rates.

“The high real interest makes the public debt increase and the GDP, decrease, worsening the relationship between the size of the debt and the GDP [73,5% em 2022]. With the worsening of the indicator, the market will demand higher interest rates to roll over the debt, leading to a self-fulfilling negative prophecy”, he says.

Pastore claims that, so far, the Lula government has been presenting an expansionist strategy (of more spending) and that, despite the president’s complaints about the interest rate, the Central Bank has already made it clear that it will keep rates high while fiscal policy does not control expenses and expectations.

With the PEC approved before Lula took office, his team expanded the space for spending by around R$ 170 billion this year, which should put pressure on inflation on the government’s demand side —although Fernando Haddad has said he does not intend to spend all the money. value.

For Lívio Ribeiro, a researcher at Ibre-FGV and partner at the consultancy BRCG, one of the symptoms of distrust in the government’s ability to adjust its accounts so that the Central Bank can lower interest rates and give growth a chance is that emerging currencies have appreciated more than the real against the dollar —despite the Brazilian real interest rate of 8 points above inflation; which, in theory, would lead international investors to bring dollars to Brazil to take advantage of this gain.

Last Thursday (2), after the Central Bank made it clear that interest rates in Brazil could remain high for longer if there were no measures in the fiscal area, the dollar fell below R$ 5 due to the attractiveness of the rate. But it rose again to R$5.15 the following day after Lula, in an interview, again criticized the BC’s autonomy and the high interest rate.

“The fact is that we are still facing brutal uncertainty about what the rules of the game will be. spending; and a fiscal package on the revenue side, via increased collection and taxes”, says Ribeiro.

Sérgio Vale, chief economist at MB Associados, says that the recent communication from the Ministry of Finance regarding a fiscal adjustment via collection (which may end up resulting in more spending), in addition to the “unnecessary noise” caused by Lula’s statements, pointing to a risk that did not exist a few weeks ago: that the Central Bank could raise interest rates even more to contain inflationary pressures, raising the public debt and further depressing the economy.

“All the signs are of an aggressive Central Bank. In its last year in office [2024], [Roberto] Campos Neto [presidente do BC] will probably do everything to try to deliver inflation on target [de 3%, com tolerância até 4,5%]”, says Vale. “If the inspector doesn’t help, higher interest rates may be necessary.”