War makes economic team fear Bolsonaro and Congress populism in fuels

The team of Minister Paulo Guedes (Economy) fears that the advance in international oil prices, due to the invasion of Ukraine by Russia, intensifies the search by President Jair Bolsonaro (PL) and Congress for “heroic measures” to try to hold prices of fuels – but which, in practice, do not work.

The team carefully monitors the risk that the conflict will harm the global economy and affect indicators of activity and inflation, although it considers it still premature to draw any conclusions.

Among the members of the minister’s team, the possibility is accepted that an eventual escalation in fuel prices may lead the president or deputies and senators to press for the expansion of initiatives, currently focused on the exemption of federal taxes on diesel and the change of ICMS ( Tax on the Circulation of Goods and Services).

One of the great fears is that the crisis will serve as a pretext to boost again the idea of ​​creating a stabilization account to hold fuel prices, using revenues from royalties, special participations and dividends from Petrobras. This measure is included in one of the bills under discussion in the Senate and has been opposed by the Economy, but it has supporters in the political wing of the government.

In the view of the economic area, this measure would be expensive and without any guarantee of a substantive change in price dynamics. Therefore, the assessment of Guedes’ team is that there is no point in resorting to this type of solution.

The minister has already given in to some of the pressure previously by agreeing to a cut of up to R$19.5 billion in federal taxes on diesel and cooking gas. On the other hand, this is considered a lesser evil in the face of initial claims for exemptions on gasoline, ethanol and even electricity. Proposals supported by government officials could have an impact in excess of R$100 billion.

At Palácio do Planalto, there is also the perception that the escalation in oil prices and exchange rates should feed pressure for measures, especially if the crisis triggers new adjustments by Petrobras, which follows international prices.

For now, fuel prices in Brazil should not rise immediately, according to the director of Commercialization and Logistics at Petrobras, Cláudio Mastella. In an interview this Thursday (24), he stated that the company will wait for the evolution of the international scenario before deciding on transfers.

The Secretary of the National Treasury, Paulo Valle, defended this Thursday that any government measures on fuel should be focused.

“The Ministry of Economy, together with the Civil House and Congress, have already been working on alternatives to combat this issue of fuel price pressure and we must continue these discussions,” he said. “Any measure has to be more focused.”

The conflict between Russia and Ukraine is initially seen by the economic team as a factor that can have repercussions for Brazil more because of the situation of the global economy than because of any direct effect on the relationship with these countries.

A greater fear at the moment is what the situation of the global economy would look like, especially in the United States and China –Brazil’s main trading partners–, as a result of the effects of the conflict.

The assessment of technicians, however, is that it is still too early to draw a more solid picture, mainly because in the midst of volatility it is more difficult to identify which will be the most lasting effects – including on commodity prices.

The Economy will close the next forecasts for inflation and growth on March 12, and the expectation is to gather elements for a more accurate assessment of the scenario until that date. Through the press office, the ministry stated that it prefers not to make statements at this time.

The geopolitical tension has brought instability to the markets, but the Treasury secretary said that Brazil is “well positioned” to face the volatility scenario and that only 5% of the debt is external.

He assured that the agency can act in the market if necessary. In extreme situations, the Treasury has the option of repurchasing securities to give exits to investors who prefer to migrate to lower risk assets.

The agency has more than R$ 1.1 trillion in cash, enough to cover the entire domestic debt service for the year. In addition, the Treasury announced that it already has all the dollars to service the external debt in 2022.

“As the Treasury has comfortable cash and we are monitoring the market permanently, we are attentive and will take the necessary measures. But I think it is early and that we are well positioned,” said Valle.

The Central Bank, through the Financial Stability Committee, was also ready to guarantee market liquidity, especially in foreign exchange. Despite the signal, the monetary authority showed confidence that the exposure of the national financial system to the effects of geopolitical tensions is low, given the reduced exchange rate exposure and dependence on external financing.

“The credit portfolio continues to perform well, provisions for credit losses are adequate and banks remain liquid and well capitalized,” the BC said in a note. “The Committee is attentive to the recent evolution of the international scenario and remains prepared to act, minimizing any disproportionate contamination on the prices of local assets, in particular through the exchange market channel.”

At the Ministry of Agriculture, a point of special attention is the fertilizer market – which had already been a target of concern over the past year due to fears in supply.

Russia is one of the largest exporters of the product and supplies 30% of Brazilian demand (according to 2022 data from the Ministry of Economy), and possible sanctions on the country commanded by Vladimir Putin could affect the market.

Minister Tereza Cristina (Agriculture) acknowledged that Brazilian purchases of the product could be impacted. “Of course it is a concern because Brazil is an importer of fertilizers,” she said on Thursday.

Despite this, she assesses that there would be other sellers. According to her, Iran recently made a significant offer of fertilizers to Brazil and the two countries are discussing adjustments on the subject. In addition, other countries can also be used to substitute the supply of the product – such as Canada and Morocco.