Opinion – Solange Srour: The legacy of 2021 is the challenge of 2023

In the last Focus Bulletin of last year, the market forecast for this year indicated inflation at 3.3%, Selic at 3%, dollar at R$ 5 and growth of 3.4%. This last indicator is the only one with better performance than expected (about 4.8%), favored by the low base of comparison of 2020. However, the economy is already showing signs of stagnation and will most likely enter into recession in the year that comes.

The 2021 IPCA will close at around 10%, the Selic at 9.25%, and the exchange rate is close to R$ 5.60.

High interest rates, high inflation and a depreciated exchange rate point to a complicated 2022. This year, we lost what is most important for the good performance of the economy —fiscal and monetary credibility— and, at the same time, we exposed the failure of the current political framework. The consequences will not only come in 2022 but will greatly affect 2023.

On the fiscal side, there is no lack of examples of setbacks. The move to increase the value and target audience of the former Bolsa Família cost the trust of our only fiscal anchor, the spending ceiling.

The new program was created without a source of funds, hurting the core of the LRF (Fiscal Responsibility Law), it did not bring significant improvement to the social protection system (which could be sought through the merger of Bolsa Família with inefficient social programs) and maintains programs with low poverty reduction capacity. As if that wasn’t enough, the decision to defer payment
part of the precatório to open space on the roof was seen as a default and increased the negative perception of country risk.

The approval of next year’s Budget, with an underestimated allocation for obligatory expenses, has permanently buried any trace of reliability in the budget piece. This is born even with high chances of being contingent, since the reserve of only R$ 1.7 billion for the salary adjustment
encouraged several categories to press for an increase, which will very likely lead to an increase in this amount.

In the coming days, we will still have discussions on the new microcredit program with the participation of public banks. Everything happens as if the latest experiences with credit subsidies had not resulted in the need for capitalization of these banks (outside the ceiling) and an increase in public debt.

At the same time, it is likely that the project will be sanctioned, which extends the tax relief to 17 sectors of the economy without a budget forecast.

A suggested way out is sending an extraordinary credit — also outside the ceiling. Definitely, spending ceiling, primary target, Fiscal Responsibility Law and Budget have become “fiction pieces”.

On the monetary side, the BC (Central Bank) is trying to regain the credibility that was compromised throughout the year. The claim that “inflation is transitory” was not unreasonable at the beginning of the bullish process.
prices accelerated, but became doubtful with each passing month and inflation remained high.

Certainly, we had numerous supply shocks, but the fact is that these spread to other prices, contaminating medium-term projections. At the same time, extremely expansionary interest rates were maintained for a long period under the allegation that inflationary inertia and exchange rate pass-through were low.

In view of the fiscal damage and the uncoupling of inflation expectations, the BC is acting to reverse this scenario and promises to keep the Selic at significantly restrictive levels, even in the face of the GDP slowdown. However, the cost of losing the monetary anchor will be high, and it cannot
be attributed only to the fiscal breakdown.

Finally, the year 2021 exposed the bankruptcy of coalition presidentialism. The system that defined the disciplined posture of parliamentarians due to the discretionary distribution of resources, based on agreements between the Executive and party leaders, collapsed.

The so-called “rapporteur’s amendments” made the release of resources a prerogative of the presidents of the Chamber and of the Senate, generating erratic behavior by parliamentarians and weakening the cohesion of the benches. “Deconstitutionalizing” such amendments has become virtually impossible, putting the next government’s agenda at risk.

The electoral debate promises to be polarized, offering little visibility in terms of the resumption of fiscal and monetary credibility, or even presenting the political feasibility of reforms so dear to growth. Whoever wins the election will face the challenge of rebuilding trust and strengthening governance. Otherwise, the costs of putting the economy in order will be very high.