With the drought prolonging longer than expected, Itaú Unibanco began to see a greater risk of electricity rationing in the country, doubling the probability estimate from 5% to 10%.
“The most important thing to determine whether or not there is rationing is how much it rains in the wet season, starting in November. But it depends on how we get there. If we arrive with very low reservoirs, the risk is greater”, said Mario Mesquita, chief economist at Itaú Unibanco, during an earlier presentation to journalists. Even without rationing, according to him, there may be periods of regionalized energy shortages in the country.
The impact of an eventual energy rationing on the activity depends on its intensity and duration. “Looking at the historical behavior, we can see that a percentage point of forced reduction in demand takes 0.2 percentage point off the GDP”, observed Mesquita. Itaú Unibanco projects 5.7% growth for the Gross Domestic Product (GDP) this year and 1.5% in 2022.
Although it expects disinflation ahead, Itaú believes that the process is quite fragile, as it depends on more volatile factors, such as the prices of industrial goods. “If the exchange rate moves for any reason, the prospect of disinflation is shaken,” said Mesquita.
Itaú expects that, at the end of the year, the dollar will trade at R$4.75. “We saw an increase in the risk premium at the margin, albeit at lower levels than we have seen this year. Despite the increased risk, there are fundamentals for currency appreciation,” said the economist.
Mesquita mentioned the improvement in the terms of trade, the increase in the interest differential adjusted by the CDS, which has already returned to the average of Brazilian peers. Among the factors mentioned by Mesquita that could hinder an expressive appreciation of the real are the fiscal risk, “which continues to boil”, and the continuation of the “overhedge”, which could induce banks to buy the future dollar. By the end of 2022, Itaú expects the dollar to be at R$ 5.10.
With this context in hand, the bank notes that, although inflation expectations are above the center of the target in 2021 and 2022, they are anchored in the target in 2023 and 2024, which indicates that the market sees the Central Bank with credibility.
“But it’s something he needs to take care of at all times to prevent that credibility from being eroded,” said Mesquita. Itaú expects the Selic to end the year at 7.5%, but the economist points out that the basic interest rate may go a little further to contain the inflationary process.
All the more constant, without further deterioration of the inflationary picture and of expectations, if one starts to think about an interest rate closer to double digits – closer to 10% than 8%, for example -, the risk of “ overkill” of economic activity would increase, replied Mesquita.
“The ‘overkill’ would be for you to tighten monetary policy now in order to have a recession next year or at the turn of 2022 to 2023. It’s not what we have now, but this risk, if you take the interest there , it can happen,” he said.