Financial market rehearses government’s ‘silent landing’, says former secretary of economic policy

Market was overly optimistic, says Mendonça de Barros

Market was overly optimistic, says Mendonça de Barros

Photo: Fabio Rodrigues Pozzebom/Ag. Brazil / BBC News Brazil

The manifestos signed in recent weeks by businessmen, agribusiness and financial market figures are the visible side of a “silent landing” by part of the economic elite of the Bolsonaro government’s support base.

The assessment is made by economist José Roberto Mendonça de Barros, secretary of Economic Policy at the Ministry of Finance between 1995 and 1998, founder of the MB Associados consultancy, in operation since 1978, and member of the board of different companies.

The “disenchantment” of part of the financial market and businessmen with the government has deepened in recent weeks in view of what he considers a turning point in the political and economic scenario.

The troubled proceeding of the reform of the income tax and the proposal of installment payment of precatório in order to turbo-charge a new Bolsa Família were mixed with the anticipation of the presidential succession, the increase of inflation and interest and, now, a water and energy crisis.

The answer came with an increase in the dollar, a fall in the stock market and an increase in future interest rates (which show the market’s expectations regarding the Selic rate in the coming years and end up being a thermometer of the country’s risk perception).

“What happened in the last two, three weeks is that this reality hit the financial market. There was a generalized review of scenarios”, says Mendonça de Barros in an interview with BBC News Brasil.

“We are talking about another world, another scenario, in which the financial market has finally capitulated.”

And it’s increasingly difficult to think of a reversal, he says, with the early 2022 presidential succession element coming into play.

“The executive pushed this discussion and now he doesn’t take it anymore. So, we’re going with it until October of next year. With the uncertainties, the pressures… which only reinforces this scenario of slowdown”, he points out.

Against this background, the country’s business and economic elite’s disappointment with the government took on new shapes.

Market 'capitated' in the face of a worsening scenario with no short-term reversal horizon

Market ‘capitated’ in the face of a worsening scenario with no short-term reversal horizon

Photo: Getty Images / BBC News Brazil

“There is already a good disembarkation. For most of these agents, this is done silently…currently, however, not so much anymore. That first manifesto, in which everyone went to the [pessoa] physics, there were important businessmen there.”

Mendonça de Barros refers to the manifesto “Elections will be respected”, a reaction to the president’s threats to elections next year.

Bolsonaro repeatedly makes unfounded accusations and without proof that the electronic ballot box would be fraudulent and says that the country would only have fair elections with the return of the printed vote. It also frequently launches attacks against ministers of the STF (Supreme Federal Court) and inflames its support base, which defends an institutional rupture through a military coup.

The economist was one of the more than 200 initial signatories to the manifesto, along with figures such as industrialist Horácio Lafer Piva, a shareholder in Klabin, a giant in the pulp and paper area, and businesswoman Luiza Helena Trajano, president of the network’s board of directors Magazine Luiza.

More recently, it was the turn of agribusiness. Seven entities launched a manifesto in defense of democracy that said that Brazil could not show itself to the international community “as a society permanently stressed by interminable crises or at risk of setbacks and institutional ruptures”.

And there is also the manifesto that was being sewn by Fiesp (Federation of Industries of the State of São Paulo) and by Febraban (Brazilian Federation of Banks), suspended after public banks Caixa Econômica and Banco do Brasil threatened to leave Febraban in case the text be released.

Although it has not been made public, the movement would be one more indication that there is already a disembarkation of this group: “I am a witness to this, in the world I can look at, the world I can talk about, it is exactly that, a disenchantment”.

Mendonça de Barros says that “no one is enchanted by the left”, but that there is a growing view that the path through the current government is not a solution either. “And then everyone is thinking and dreaming about what is conventionally called the third way, something as desirable as it is difficult to get up on.”

Military parade during the consideration of the vote printed in Congress on August 10: president feeds tension

Military parade during the consideration of the vote printed in Congress on August 10: president feeds tension

Photo: Reuters / BBC News Brazil

exaggerated optimism

The financial market managed to hold optimism until mid-May and June, recalls the economist.

At that time, there was a view that the debt/GDP ratio was improving and that tax revenues were growing, in addition to the expectation that Congress would pass reforms with some ease.

“There was a certain [expectativa para] inflation, but it wasn’t 8%, they had a certain interest rate increase, but it wasn’t 8.5%.”

Even then, however, the excitement was exaggerated, he says. The apparent improvement in the fiscal part signaled by the debt/GDP ratio, exemplifies Mendonça de Barros, was a “statistical illusion” caused by the acceleration of inflation.

The idea is that when inflation accelerates, nominal GDP grows faster (because prices rise, not necessarily because the economy produces more), while the debt stock takes longer to increase. This is because the public debt follows the movement of the basic interest rate, raised by the Central Bank in a second moment, in reaction to inflation. There is, therefore, a lag.

In the economist’s assessment, the market was also mistaken in the analysis that the reform agenda would move more quickly with the alliance between the government and the Centrão. The risk that the quality of what was approved was not worth it — now materialized — has always existed.

A recent example is the Provisional Measure for capitalization of Eletrobras, approved with so many “tortoises” (a term commonly used to refer to the inclusion of paragraphs completely unrelated to the subject of the device) that, in the assessment of entities in the electricity sector, should increase the cost of energy. And there is the reform of the Income Tax, which is being processed in a version with so many changes that, today, it would cause even more distortions in the already complex Brazilian tax system.

“Obviously, the market was eager to believe in the optimistic scenario because there was business there… I’ve been a financial market consultant for 43 years, I’ve lived long enough to know what it’s like”, he points out.

“There was a queue of IPOs [sigla para Initial Public Offering, a estreia na bolsa de empresas até então de capital fechado], very business, very bad [sigla para Mergers and Acquisitions, fusão e aquisição de empresas], which only goes forward with an optimistic scenario. In the defensive scenario these things stop, and indeed they did.”