Amid the increase in the number of deaths and hospitalizations in Brazil due to Covid-19, banks are already drawing a more pessimistic scenario for the performance of the country and public accounts this year, with a greater risk of breaking the spending ceiling. .
Itaú Unibanco, for example, considers a worsening of the primary deficit (not including the payment of interest on the debt). Economists have included a greater volume of emergency spending in their accounts beyond the spending ceiling. The assessment is that, due to the current dynamics of the pandemic, there may be more flexibility in the rule that limits public spending.
“Such a scenario would impact the already fragile Brazilian fiscal sustainability, increasing the domestic risk premium, with negative effects on interest, foreign exchange and economic activity in 2021 and, predominantly, in 2022”, summarizes the institution’s team, which revised the deficit estimates of 2.5% of GDP (Gross Domestic Product) to 2.8%, or from R $ 207 billion to R $ 235 billion.
The review occurs because the bank’s perspective is that emergency spending that is not subject to the ceiling should grow, reaching R $ 100 billion (or 1.2% of GDP). In addition to spending on the health system, the increase would come from programs to protect formal employment, such as the Emergency Benefit (BEm) and Pronampe, for corporate credit.
“The dynamics of the pandemic over the past few months generated greater pressure to repeat subsidized credit programs. The risk is that the ceiling will be relaxed,” says Júlia Gottlieb, an economist at Itaú Unibanco. She points out that the institution has already been emphasizing that there is a not insignificant fear of greater flexibility in the spending ceiling ahead. “We see, however, that the rate of vaccination has increased, which should cause relief.”
Even so, Itaú Unibanco considers that the economic impact of the second wave has been more moderate than that observed in the second quarter of last year. For this reason, the bank maintained its projection of Brazilian GDP growth at 3.8% for 2021. The deterioration of the country’s financial conditions, however, should affect growth in the following year.
The economist points out that the consumption of services is still the most affected by social isolation and that she must suffer the consequences of the necessary measures of social distance in the coming weeks. “But other sectors, such as the consumption of electricity by the industry, show a reaction. The economy seems to be learning to live with restrictions. ”
In an extreme scenario, BTG Pactual, in turn, warns that, if public spending increases and there is a strong rise in country risk, the dollar rate could end the year at R $ 6.40. “The main negative risk for the foreign exchange scenario is a sign of further deterioration in public accounts,” said the bank. In the base scenario foreseen by BTG, the US currency should close the year at R $ 5.40 (R $ 0.20 above what was previously forecast).
The bank also revised the expectation for inflation by the IPCA (Broad Consumer Price Index), from 4.7% to 5%. “The revision is due to high surprises in the short-term scenario: in particular, industrial goods. The fuel scenario was also surprising, but part of the pressure tends to be reversed. ”
JP Morgan warns that if isolation measures become more lax in the next three months, even with the progress of vaccination, there may be a new wave of Covid-19 in Brazil, with a number of cases close to the levels of the first wave. of the pandemic in the second quarter of last year.
In the view of investment manager Rio Bravo, there is a recognition of the risk of an acceleration of inflation, whose initial impulse would come from the prices of commodities – the basic products on which Brazil depends on its exports – and from the devaluation of the exchange rate. “The reverberation of these shocks [de preços] inspires care and the Monetary Authority raised basic interest rates to 2.75% per year, indicating similar increases for the future. ”
“The impression is that the usual arm wrestling between the Legislative and the Executive around the Budget Law, this time, is being repeated several octaves beyond the normal, and may even produce unnecessary crises. Covid-19 was enough”, adds Rio Angry.