Dollar should end the year at R$5, but there are risks, says BTG Pactual Digital By

By Ana Julia Mezzadri – In the analysis of BTG Pactual Digital, in a report distributed this Wednesday (8), the month of September will be “decisive for the direction of the exchange rate”, amid the escalation of tension between the Powers and fiscal risks. At this time, however, the bank’s projection is that it will end 2021 at R$ 5.

With caution, the bank points out that the accommodation that has been presented in the exchange rate should be put at risk by economic indicators in Brazil and abroad, in addition to political developments in the domestic scenario, which could increase risk aversion.

In the external scenario, the main event with the potential to change the exchange rate, according to BTG Pactual Digital, is the FOMC meeting, which can define when the tapering will start (gradual reduction of monetary stimuli). Until then, the expectation is that this movement will start in December and that this month’s meeting will confirm this panorama. This, according to the bank, would be positive for the real and other emerging countries.

Internally, the market will be eyeing the Copom meeting, looking for signs of a more hawkish stance following signs of persistence in the . If this is confirmed, the financial flow to Brazil could increase, favoring the real.

Other points in the domestic scenario that may weigh on the exchange rate are the water crisis, tax reform, administrative reform and the discussion on court orders. “The time constraint imposed by next year’s election tells us that if these issues do not move forward this month, few relevant changes will be made until the composition of the new government is defined,” analysts say.

Considering all these points, BTG Pactual Digital designed three possible scenarios for the exchange rate at the end of 2021: the base scenario, with a 50% chance of materializing, the optimistic scenario (15% probability) and the pessimistic scenario ( 35%).

base scenario

In the base scenario, the dollar would end 2021 at R$5, the dollar at 92 and the Treasury bond at 1.5%. In this scenario, the bank considers that the infrastructure package would be approved in the US, financed by debt issuance and tax hikes, and tapering would start in December with interest hikes only in 2023.

In Brazil, the new Bolsa Família would be approved with a benefit of R$300, allowing the maintenance of the gross debt/GDP at 82%. Vaccination would continue at the pace of August, tax reform and the privatization of Correios would advance in 2021 and the spending ceiling would be maintained. Finally, commodity prices would remain at high levels.

optimistic scenario

In the optimistic scenario, in turn, 2021 would come to an end with the dollar at R$ 4.80, the dollar index at 90 and the 10-year US bond at 1.4%. In this scenario, the US infrastructure package would be approved with financing coming mostly from higher taxes and tapering would also start in December, with an increase in interest rates in 2023.

Domestically, there would be an increase in collections in 2021 and the new Bolsa Família would be approved with a benefit of R$270, so that the gross debt/GDP would be below 82%. The pace of vaccination would be accelerated and, as in the base scenario, the tax reform and the privatization of Correios would advance in 2021 and the spending ceiling would be maintained.

In the field of commodities, a resumption of global growth above expectations would further increase prices.

pessimistic scenario

Finally, in the pessimistic scenario, the dollar would end 2021 at R$5.40, with a dollar index at 94 and a 10-year US bond at 1.75%. In this projection, the US infrastructure package would be financed mainly through debt issuance and tapering would start this year, with interest rate hikes in 2022.

Internally, the new Bolsa Família would have a benefit of R$300, but would be removed from the spending ceiling rule. The delta variant risk would be confirmed, with an increase in the number of cases and resumption of restriction measures. The reform agenda would be paralyzed, as would the postal privatization project.

For commodities, there would be a worsening in economic growth expectations, reducing demand.