Market perception of roof breaking is worse than reality, says Gustavo Franco

The prospects for conducting the government’s fiscal policy for 2022 have generated a strong negative reaction from the financial market in recent days, with a fall in stocks on the stock exchange and a rise in the dollar and interest rates.

Despite the uncertainties in the economic field amidst the electoral race that lead to increased risk aversion, for former BC (Central Bank) president Gustavo Franco, there is some exaggeration in these recent moves by investors.

“The perception of the outcome of the conversation about the ceiling [de gastos] it was worse than reality, either because in the environment of political polarization in which we are, everything always seems more controversial to the other side (or even for those in the middle), or because the roof mechanism was not all that was said and its expiry date was even expired”, defends the economist and director of the asset manager Rio Bravo Investimentos, in a letter published this Friday (5).

The 2016 Constitutional Amendment (EC) 95 that established the ceiling, Franco points out in the text, served only as a kind of electrified fence that cannot be touched, but it did not limit or change expenses determined by the Constitution.

He says the ceiling should have been replaced by other, more conventional mechanisms for maintaining fiscal responsibility. “However, not only did we not carry out definitive fiscal consolidation, the pandemic dramatically reduced the expiration date of the ceiling.”

For the former BC president, although the intentions with the recent measures in the fiscal field in Brasília are clearly electoral, the expansion of federal income transfer programs is a good idea, coming at a time when economic activity is weakening.

According to the expert, “old fears about fiscal risk and its inflationary implications were visible, but the Central Bank fulfilled its duty by raising interest rates” by 1.5 percentage points at the last Copom (Monetary Policy Committee) meeting, at the end of October .

Franco says that the monetary authority is “behind the curve” in the fight against inflation, but understands that it has correctly fulfilled its role. “It remains to be seen what news Minister Guedes has planned to offset the negative perception left by recent events in the field of fiscal responsibility,” writes the economist.

In any case, he already anticipates that the government’s lack of commitment to fiscal responsibility is unlikely to be reversed. For the former BC, recent events reinforce an old wisdom according to which rules limiting the fiscal conduct of government are always useless. “When rulers have good faith, rules are unnecessary; when they don’t, they are always circumvented.”