The Ministry of Economy reduced the official expectation for the growth of the GDP (Gross Domestic Product) this year from 5.3% to 5.1%. For 2022, the forecast dropped from 2.5% to 2.1%.
The cut in this year’s forecast had already been signaled in September, when the 0.1% drop in the economy in the second quarter frustrated government expectations – which projected an increase of 0.25% in the period.
According to the ministry, the main domestic factor for the cut is the deterioration of financial conditions in the country, with an increase in interest rates. The rates have been stimulated by the advance of inflation and by the market’s distrust in relation to public accounts, mainly driven by the discussion of the PEC (proposal to amend the Constitution) of the Precatório – which circumvents the spending ceiling.
The ministry claims that the main global economies have been affected as a result of factors such as the break in supply chains for the industry, problems in energy supply and rising prices.
The projection for the Brazilian inflation also worsened in the data updated this Wednesday (17th). The government’s expectation for the IPCA (Broad National Consumer Price Index) in 2021 jumped from 7.90% to 9.70%. For 2022, the IPCA projection increased from 3.75% to 4.70%.
Despite the cuts, government values remain better than market expectations. According to the most recent Focus bulletin, which brings forecasts made by analysts and gathered by the Central Bank, expectations are for growth of 4.88% for 2021 and 0.93% for 2022.
Some banks even go further and already see recession next year. This is the case of Credit Suisse, which projects a 0.5% contraction in 2022 citing the global scarcity of inputs and the weak dynamics of economic activity.
In terms of inflation, the market also estimates a performance worse than the one calculated by the government. According to Focus, analysts see the rise in the IPCA in 2021 at 9.77%. For 2022, the expectation is at 4.79%.
The ministry’s new projections are in the Macrofiscal Bulletin, updated bimonthly by the SPE (Secretariat for Economic Policy) – headed by secretary Adolfo Sachsida. Commenting on the discrepancies in the numbers compared to those estimated by the market, he stated that projections for the folder last year (for a 4.7% drop in the economy) were considered optimistic at first, but later were close to what was verified (GDP fell 4.1%).
“Gradually, our fiscal commitment will become clear and, in April of next year, analysts will start to change growth expectations, converging on those of the SPE,” stated Sachsida.
The difference between the numbers and those expected by the market is explained this time by factors such as the government’s expectation of a strong recovery in the labor market, the increase in private investment and the continuity of the reform agenda and fiscal consolidation – agenda which, according to him, “remains unchanged”.
“Our economic policy, of the binomial fiscal consolidation and pro-market reforms to increase productivity, is correct. We continue to insist on this policy, because it is it that will chart a path to long-term prosperity for the Brazilian economy,” he said Sachsid.
Despite the speech, the market sees a deterioration in the government’s agenda in relation to public accounts and has reacted negatively to the behavior. Since August, when the PEC dos Precatórios began to be discussed, interest and exchange operations have been under greater pressure. Rates charged by investors to lend to the National Treasury rose 29% in just over three months.
Defended by the government, the PEC dos Precatórios (debts to be paid by the State as a result of court rulings) circumvents the constitutional rule on spending ceilings by releasing R$ 91.6 billion in 2022 without the need to cut other costs. The text makes two main moves: it creates an annual limit for payment of court judgments (throwing the excess over to subsequent years) and changes the calculation of the annual federal spending limit (expanding it).
As a side effect, the PEC can also generate a snowball in the payment of court orders. The limit for the payment of court sentences could generate a liability of BRL 580 billion in debts until 2036, according to a survey by the Budget consultancy of the Chamber of Deputies (something that the government intends to mitigate with measures such as giving the holders of precatory shares of state-owned companies , land and other assets of the Union).
The government claims that this operation is necessary to provide a solution for the high volume of court orders to be paid next year (R$ 89 billion) and to accommodate Brazil Aid within the spending ceiling. But the strategy goes beyond that and also makes room for other measures that boost the government’s popularity on the eve of the electoral calendar – President Jair Bolsonaro has already mentioned initiatives such as a gas voucher, aid for truck drivers and even a readjustment for civil servants.
Sachsida stated that there is a “noise” in the perception of the PEC, which will be mitigated after the text is approved. “When you look back, it is very clear that we have done a great job of fiscal consolidation. The doubt is for the future. But these doubts come mainly from the PEC dos Precatórios, related to Auxílio Brasil. In the next two weeks, these matters will be addressed. “said Sachsida.
Asked if insisting on the idea that the fiscal agenda is “unchanged” does not compromise the credibility of the economic team, Sachsida said that all economic policy has “trade-offs” (an expression used to describe a choice in which, in practice, something is accepted bad to achieve something good).
“All economic policy has trade-offs and is confronted with undesired effects. We need to look at economic policy in the context of the net result it generates, and not punctually,” he stated. For him, the PEC will provide the payment of the Brazil Aid, respect the fiscal consolidation process and provide legal certainty for the holders of court orders.
The Special Secretary for the Treasury and Budget, Esteves Colnago, stated that the new data calculated by the SPE will support the discussion on the PEC and the reformulation of the 2022 Budget proposal – which has outdated estimates.
The new numbers are likely to put pressure on numbers next year by raising mandatory spending projections (due to higher inflation) and potentially lowering revenue estimates (due to lower-than-expected activity).
The projection for the INPC (National Consumer Price Index), which serves as the basis for calculating the readjustment of a series of mandatory expenses – such as pensions – went from 8.4% to 10.04%, further pressuring the ceiling of spending.
“The information he [boletim] is bringing will be the ones that we will use both to assess the impacts of the text under discussion of the PEC 23, which is in Congress, and to prepare the message to modify the Budget, perhaps even in early December,” said Colnago .
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