Lula and Bolsonaro have already shown commitment to fiscal balance and reforms, says XP’s chief economist – 15/09/2021 – Panel

The two names currently leading the voting intention polls for the 2022 elections, Luiz Inácio Lula da Silva (PT) and Jair Bolsonaro, have already demonstrated in their trajectories that they are aligned with fiscal balance and long-term structural reforms, which should head the economic agenda for the next presidential term, says Caio Megale, XP’s chief economist.

“What is important for the next presidential term, in my view, is the maintenance of two directions: fiscal balance, especially now that Brazil is at a high level of indebtedness, with high fiscal fragility, and the other is to advance with reforms that increase the productivity and competitiveness of the Brazilian economy,” says Megale.

Former secretary of industry and former director of programs at the Ministry of Economy, he points to the risk that the political crisis generated by Jair Bolsonaro’s anti-democratic attacks will interfere with the vote on the Budget in Congress, which is already delicate due to its current uncertainties.

“When the political temperature rises, the risks of fiscal overruns in Congress increase, and this translates into volatility in the exchange rate, in the increase in future interest rates, which, in the end, determine the liquidity conditions of companies “, analyzes Megale.

In view of the political turmoil that has been accumulating, the economist believes that Paulo Guedes’ portfolio must focus on solving short-term uncertainties that can affect the performance of economic agents, such as the budget vote and the water crisis.

Bolsonaro’s anti-democratic attacks caused a significantly negative reaction from the market. In your view, how should this impact the economy going forward? It has an impact, which is more direct, of this rise in political temperature on congressional votes. Congress has important issues to be voted on in the short term and I think the most important of them is next year’s Budget.

It is critical because it is not balanced. The inflation projection is old, of 6.2%, the inflation that we estimate today by the IPC (Consumer Price Index) is already at 8.6%. Higher inflation translates into more expenses in areas such as Social Security, which are all indexed. The Budget will have to be corrected for this factor.

The Budget does not include the projection of an increase in the Bolsa Família, nor does it have the so-called rapporteur amendments, a volume of amendments. There are BRL 70 billion of adjustments that need to be made, and the most likely is that the bulk of this will be done via the PEC of the Precatórios or some solution for them, which are compressing expenses in the ceiling.

When you analyze the Budget issue, you see that it will have to be a procedure with a lot of coordination involving the Legislative and also the Judiciary, so that it does not result in a deeper fiscal slippage, in a deeper change in the structure of the spending ceiling.

When the political temperature rises, the risks of fiscal overruns in Congress increase, and this translates into volatility in the exchange rate, in the increase in future interest rates, which, in the end, determine the liquidity conditions of companies.

Such uncertainty generates volatility in credit markets and this affects the ability of companies to invest, borrow, etc. And there is also a reform agenda that requires coordination of the Powers.

It also has an indirect effect, which is the feeling of polarization and electoral debate long before expected. Worldwide, presidential election year suggests some apprehension in sectors and companies. This usually lasts for four or five months. The feeling is that it started much earlier. It is a long period of volatility that ends up affecting the economy and markets.

When it gets involved in these political crises, could Brazil be letting the tram pass, that is, could it be out of step with the pace of economic recovery in the world? Commodity prices have stopped rising, some are falling, there must be a global slowdown. I think Brazil took a while to engage in the global recovery, which began in May and June of last year, after the worst impact of the pandemic happened in the world.

The economy started to recover, commodities rose, exchange rates began to appreciate in several countries, and Brazil did not follow suit at first. The second half of last year was one of volatility, uncertainty, the topic of the vaccine took a long time to advance.



When the political temperature rises, the risks of fiscal overruns in Congress increase, and this translates into volatility in the exchange rate, in the increase in future interest rates, which, in the end, determine the liquidity conditions of companies.

At the turn of the year, I think it got on well, we had a good performance in the economy in the first half, but now, looking ahead, the uncertainties are in fact greater on both sides. Both the domestic ones, which have to do with this political and fiscal volatility added to the water crisis and the fact that inflation is high, as in the world, which should no longer contribute as positively as until now.

The world is starting to slow down, some commodities are falling, central banks in Europe are going to start putting the brakes on. It becomes more important now to focus on themes that remove short-term uncertainties. That’s why I think the Budget theme is so important.

How does the political crisis influence this new round of revisions, which already brings GDP below 1% in 2022? The high political temperature is one more ingredient in a set of factors that make 2022 more challenging. You have a different economic policy than it has been until now, since monetary policy has been accelerating so far, and spending and interest rates from now on must be more balanced. There is also a water crisis, and then the fiscal issue is not very clear, it is not known how the votes in Congress will evolve and this affects agents’ expectations.

Should Minister Paulo Guedes and the Ministry of Economy be more incisive in pointing out the economic losses of Bolsonaro’s anti-democratic attacks? I think the economic team has to focus on removing short-term economic uncertainties. And they have been working on this attempt to balance the Budget issue, in an attempt to offset the effects of the water crisis, although this is very difficult, as we do not know the intensity of the impact.

What gets harder at a time like this is debating deeper, broader reforms. In delicate moments of dialogue with Congress, it is better to focus on short-term issues, which remove uncertainties, than to carry out very complex structural reforms that may not have the desired final design.

An example is this reform of the Income Tax, which had the positive intention of the government, I think it went in the right direction, but over time it had to accommodate interests and now we are not sure that it will have a positive effect on the economy .

What the Economy Ministry must do is keep the helm of the boat steady and focus on those short-term risks that are worrying the markets, especially the Budget issue.

Could this current crisis and the federal government’s management facing it put the legacy of the Plano Real at risk? I do not think so. We are a long way from putting at risk the legacy of Plano Real. He brought stability to the Brazilian economy, low inflation, and the current government I think has contributed to that with at least two reforms. First, Social Security, which is very important to reduce the fiscal pressure that hampered economic uncertainty.

Second, the independence of the Central Bank, which crowned a process that began back in the Plano Real, had a second stage when inflation targets were implemented and now finally independence.

Inflation is high, but due to a sequence of national and international shocks, a veritable perfect storm. As someone said, a storm without water, which is even worse because of the water crisis.

In any government in the world, it is natural to feel pressure when the BC starts to raise interest rates. In Brazil, in past governments, there was always someone who complained. This time, BC is rising independently.

I have no doubt that with BC action, and with the world balancing out, commodities dropping a little, production chains starting to work again, inflation will settle down.

Mr. I have already said that Brazil seems to have advanced the electoral discussion. I would like to know your medium-term expectation of market reactions to the polarization between Bolsonaro and Lula (PT). Political polarization is not a problem in itself. It is a problem as the debate takes such proportions that important short-term issues, such as reforms, adjustments, measures, addressing the water crisis, are harmed.

If the debate and evolution towards the election stays at a level that does not hinder short-term management, as seems to be the case so far, I think that’s okay, it’s the game. Market volatility is not linked to the fact that one or the other wins the election, in my view, but rather to the uncertainty of how short-term issues will be managed. If she becomes less encumbered by the political debate again, then I think things tend to calm down.

I do not regard this volatility in elections per se, but how much the political temperature can hinder something that is super important now, which is, for example, the management of the water crisis.

Economist Edmar Bacha told Folha that Bolsonaro is a risk to democracy, and Lula is a risk to the economy. Mr. do you agree? What is important for the next presidential term, in my view, is the maintenance of two directions: fiscal balance, especially now that Brazil is at a high level of indebtedness, with high fiscal fragility, and the other is to advance with reforms that increase the productivity and competitiveness of the Brazilian economy.

Both Lula and Bolsonaro have already demonstrated adherence to this agenda at times during their administration. The beginnings of the Lula and Bolsonaro administrations were moments in which this agenda was very present.

I think the issue is not very personalized on the person who will win the election, but rather on the agenda of short-term macroeconomic balance and long-term structural reforms.

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