posted on 8/22/2021 7:00 AM / updated on 8/22/2021 12:31 PM
(credit: EVARISTO SA / AFP)
While President Jair Bolsonaro goes into direct confrontation with the Federal Supreme Court (STF), triggering a new chapter of the institutional crisis, market analysts see an increasingly bleak future for the economy in 2022. Inflation is unrelenting and the risks fiscals are back on the market’s radar, which does not rule out stagflation or even recession next year, mainly due to the increasing cost of a Bolsonaro that signals that it will do everything it can to win in the electoral fight.
The reality shock of this populist Bolsonaro is underway, and as a result, estimates for growth in the Gross Domestic Product (GDP) for next year are in free fall and not even the risks of recession or stagflation are discarded. The scenario designed by analysts for an election year, which is usually atypical, is one of an increasingly weak economy, with rising interest rates and strong inflation, eroding the purchasing power of Brazilians and keeping millions of them in the unemployment line.
This pessimism was the result of mixed signals about the government’s fiscal responsibility, which does not reveal the size of the new Bolsa Família or how it will be funded. In addition, the Minister of Economy, Paulo Guedes, defends tooth and nail a measure that undermines the Constitution by proposing the postponement of payment of court orders — judicial debts of the Union — through the Proposal for the Amendment to the Constitution (PEC) no. 23/2021, which also tries to circumvent the spending ceiling — a constitutional amendment that limits the increase in spending to the previous year’s inflation — to make more room for public spending in the middle of an election year, according to experts.
No wonder confidence in the government has deteriorated. Interest charged for the purchase of government bonds is in double digits, both for medium and long terms. According to Sergio Vale, chief economist at MB Associados, the Bolsonaro cost is leaving the economy worse than before the impeachment of Dilma Rousseff, with August inflation likely to run at the 2015 level, when the Consumer Price Index Broad (IPCA) accumulated an increase of 10.67%, and the dollar will continue to appreciate at R$ 5.50 as the floor for the coming months and next year.
The median of market estimates for 2022 GDP, from 2.5% at the beginning of the year, is heading towards 1.5%, but some analysts do not rule out a rate close to 1% on next year’s GDP. As the statistical load forecast for this year is around 1.4%, if these new projections are confirmed, GDP growth will be null, at best, while the basic interest rate (Selic) should remain above the level neutral, from 6.5% to 7% by the end of the year, according to the signal given by the Central Bank, which will help to curb activity next year.
“The fundamentals are not good and are deteriorating throughout the year. Low inflation does not exist and Selic should end the year between 7.5% and 8.5%, which will lead to a real interest rate between 3.5% and 4%, a level that could lead the country into recession in the year that is coming”, warns economist Simão Silber, PhD professor at the University of São Paulo (USP). He forecasts the GDP of 2022 growing only 1% next year, mainly due to the institutional crisis that is brewing. “The conflict between the Powers is very fierce and should make the institutions even more distrustful. This bad mood increased with the possibility of default by court orders, through a unilateral request to restructure a debt that has to be paid”, he adds.
Gabriel Leal de Barros, chief economist at RPS Capital, recognizes that the scenario is worrying and points out that the biggest risk is the hydrological one, because “it could put the country in a stagflation scenario if there is no rain in the fourth quarter of this year”. Barros, for the time being, maintains at 1.8% the estimate of GDP expansion in 2022, after a growth estimated by him of 5.5% this year, but admits a negative bias if the drought persists.
Sergio Vale, from MB, reduced the GDP growth forecast in 2022 from 1.8% to 1.4%, but he admits that the bias is towards new lows. “We will have a dramatic scenario next year, with high interest rates and very weak growth in the midst of a very polarized election,” he says. According to him, this new wave of market reviews is the result of a combination of the worsening of the domestic and international markets. “But the central backdrop is the constant slippage of economic policy and the weakening of the president on the eve of the election year. From Bolsonaro’s temper, it will be hard to believe in any compromise. This permanent state of conflict will continue to take away from growth points”, he adds.
Roberto Padovani, chief economist at Banco BV, is more concerned about the worsening external scenario, which should not help the recovery of the Brazilian economy, as was happening at the beginning of the year. “The pessimism will continue, because emerging markets, such as Brazil, will suffer a lot of instability with the prospect of how high interest rates in the United States will be. And, internally, we are still uncertain about the effects of the water crisis this semester, which we still do not know if they will be more or less intense. And this water crisis communicates with the more competitive political environment, and this increases market risks and tends to force more volatility”, he explains. Padovani also does not rule out the fiscal issue in this balance of greater risks. “There is a set of noises that affect growth in the next year”, he adds.
The optimistic short-term estimates are being dissipated and are not expected to improve due to the increase in fiscal restrictions, according to economist Silvia Matos, coordinator of the Macro Bulletin of the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV Ibre), which forecasts an increase in 1.6% in GDP for next year and also does not rule out downward revisions. “There is a lot of noise about the government’s alternatives of finding space in the 2022 Budget in an election year. There is a legitimate demand for social spending, the problem is that the worsening fiscal issue has contaminated the exchange rate scenario and the risk of inflation, which is high, and adds more fuel to this fire. Even with a more benign view that the Central Bank is going to make monetary policy help to control inflation, the fiscal risk via exchange rate discourages agents’ expectations”, he highlights.
“Pessimism gripped the market with the government’s onslaught with unclear measures in relation to the fiscal issue. This contributed to the GDP revisions for 2022, with some below the statistical burden of 1.4%”, warns economist Juan Jensen, a partner at 4E Consultoria. He says that the market knows that Bolsonaro has always been a populist, but minister Paulo Guedes was the one who used the scale to contain it, but that confidence is dissipating. “The PEC of precatório was the last straw and there is still the new Bolsa Família that the government needs to find a fiscal space. There is a lot of noise, but the scenario is deteriorating more due to expectations than to actual actions”, he says.
Unlike Paulo Guedes, the president of the Central Bank, Roberto Campos Neto, who has more credibility with the financial market, admitted growing concern with the fiscal and with the persistence of inflationary pressures. He has even made it clear that the BC will do “whatever is necessary” to keep inflation within the target. However, analysts admit that, even with BC’s efforts, the 2021 target ceilings of 5.25% — it has already gone into space — and the 2022 target, 5%, may not be met for two consecutive years .
Due to these inflationary pressures, Eduardo Velho, chief economist at JF Trust Gestão de Recursos, estimates that the Selic rate could reach 9% in March 2022, or even rise further over the next year. “Inflation is persistent, even when we take out the seasonal effects. In July, our estimates already indicated an IPCA above 4% next year, but it is possible that inflation will be above the target in 2022, unless there is a big change, with a sharp drop in commodity prices.” Old alert.
Economist Silvia Matos, coordinator of the Macro Bulletin of the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV Ibre), recalls that inflation, which helped the government to correct the ceiling, creating extra space, is charging its price in advance . According to her estimates, the National Consumer Price Index (INPC), which corrects expenses, should be 8% at the end of the year, and with that, the ceiling slack, which was corrected by the Consumer Price Index Broad (IPCA) accumulated until June, of 8.35%, may not exist. This extra space was initially estimated at R$ 30.4 billion by the government, considering a 6.2% increase in the INPC. “The blanket was shorter and the inflationary bonus was short-lived. In fact, inflation is never good. And for the inspector it will be another challenge”, he summarizes.
The pessimism that gripped financial agents made the São Paulo Stock Exchange (B3) fall below 115,000, even for a short period, and the dollar hit R$5.40 again, while the government insists on defending the Proposed Amendment to the Constitution (PEC) of the precatoria. Only in the accumulated from August to Friday (19), when it closed at 118,052 points, the B3 accumulates a drop of 3.07% compared to July, a rate greater than the 0.81% accumulated in the year. According to opposition lawmakers, the government will not have support for this pedaling proposal. Meanwhile, interest rates on fixed rate government bonds maturing as of 2026 have already exceeded 10% a year.