Tension on the Esplanade raises risks and worsens market expectations

posted on 09/09/2021 05:57 / updated on 09/09/2021 05:58

  (credit: illustration editor)


(credit: illustration editor)

Economic agents reacted in the worst possible way to the demonstrations on September 7 and to the statements of President Jair Bolsonaro, intensifying the confrontation with the other Powers. The consensus among analysts is that, from now on, the scenario, which was already pessimistic, became more nebulous due to the increase in the “Bolsonaro cost”. With this, the population will have to bear the bill of greater uncertainty, via low economic growth and high inflation. The forecast is that price indices can reach double digits, as already happens with the interest charged by the market to invest in government bonds. Papers maturing in January 2031, for example, were once again traded above 11% per year.

The statements made yesterday by the heads of the Judiciary and the Legislature, opposing the president, left doubts on what is yet to come on the political scene. The market is also looking forward to the demonstrations by the opposition to the government, scheduled for next Sunday. Analysts estimate that Bolsonaro, despite the drop in popularity, still has the support of a section of the population that cannot be ignored. However, they assess that the government will have much more difficulty in advancing with reforms, such as tax and administrative, and, to make matters worse, it will go back on fiscal adjustment. The forecast is that the Centrão will charge dearly to stop the impeachment, and, as there is no room for new expenses in the 2022 Budget, the exit should be via the overflow of the spending ceiling — a constitutional rule that limits the increase in expenses to inflation.

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Another consensus among analysts is that, by challenging the Federal Supreme Court (STF) again, Bolsonaro stopped the solution that had been negotiated with the National Council of Justice (CNJ) for the problem of precatories, the Union’s judicial debts In total, R$ 89.1 billion must be paid in 2022, which leaves no room for the president’s promise to increase the value of Bolsa Família benefits in the months leading up to next year’s elections. “The fiscal risk has increased and, if there is no solution for the precatories, the government will probably go through the roof”, warned Eduardo Velho, chief economist at JF Trust Gestão de Recursos.

Volatility

No wonder, the worsening in expectations brought down the São Paulo Stock Exchange (B3) and made the dollar rise sharply yesterday. According to economist Juan Jensen, a partner at 4E Consultoria, the trend is for a lot of volatility in the financial market until the 2022 elections. “The outlook has worsened. This government only delivered the Social Security reform and will not be able to deliver anything else, not even fiscal adjustment. If anything comes, it will be very punctual”, stated Jensen. “Administrative reform is not very ambitious. And the reform of the Income Tax, it’s better to bury it, because it got so bad that the best option is not to do it”, he added.

Jensen reduced the 2021 Gross Domestic Product (GDP) forecast from 5.2% to 4.9%, but maintained the 2022 expansion estimate at 2.4%. More pessimistic, Banco Fator’s chief economist , José Francisco de Lima Gonçalves, started to forecast increases of 4.1% this year and 1.1% in 2022 — “at best”, because the estimate does not consider the effects of an aggravation of the water crisis.

“Everything has changed levels and, now, nobody knows what will happen”, said Gonçalves. “The country just doesn’t go into recession by chance,” he warned. The economist, however, does not rule out the chances of the country entering a scenario of stagflation – very low growth with inflation – since the Central Bank will continue to raise interest rates to contain the inflationary process and, consequently, will help to curb GDP. “At best, the country will return to record mediocre growth rates,” he stressed.

Economist and consultant Alexandre Schwartsman, former director of the Central Bank, who started to forecast GDP increases of 4.9% this year and 1.5% in 2022, notes that the country’s growth will be “modest” , especially due to the limitation of the main engine of GDP: household consumption, which stagnated in the second quarter. He highlighted that the recovery in consumption “seems to be held back by the poor performance of the labor market”. “I believe that it will improve in the second half of the year, in the wake of vaccination, whether due to the greater consumption of services or the increase in employment associated with this sector, but remembering that the slat is low”, he said.

Investments

According to economist Silvia Matos, coordinator of the Macro Bulletin of the Brazilian Institute of Economics at the Getulio Vargas Foundation (FGV/Ibre), another engine of GDP growth, investments, should not contribute to more robust activity rates. “The trend is for investments to fall in the coming quarters due to the base effect, and they should not help the recovery”, he warned.

Sílvia Mastros also commented that the creative accounting that had been boosting investments in the second half of 2020 has ended: the fictitious reimportations of old oil platforms, which, in fact, never left the country.

Alex Agostini, chief economist at Austin Rating, recalled that the inevitable worsening in public accounts is holding back foreign capital. “Investors are not turning their backs on Brazil, but looking at the country with a gigantic magnifying glass and starting to discuss guarantee actions and a higher risk premium to invest here”, he summarized.

Stock market falls and dollar rises

The acts of September 7 had a devastating effect on the financial market. The Ibovespa, the main index of the São Paulo Stock Exchange (B3), plummeted 3.78% yesterday, closing the session at 113,413 points. It was the biggest fall in the stock market since the annulment of the sentence of former president Lula by the Supreme Federal Court (STF), in March of this year. With the retraction in the value of shares, companies listed on B3 suffered a loss of R$ 195 billion in market value, according to data from the consulting firm Economática. The Ibovespa accumulates a decline of 4.52% in the month and a loss of 4.71% in the year.

The noise and animosity in the political scenario were also reflected in the dollar, which rose 2.89%, closing Wednesday at R$5.326. Cristiane Quartaroli, an economist at Banco Ourinvest, says that the currency, which has already opened on a high, rose even more after statements by the president of the STF, Luiz Fux, who reacted harshly to the criticism that President Jair Bolsonaro has been making to the Court – indicating that the political temperature will remain high. “The feeling of worsening of the institutional crisis should continue to increase both volatility and risk aversion here in Brazil, putting pressure on our currency,” warned Quartaroli.

Economist Lívio Ribeiro, associate researcher at the Brazilian Institute of Economics (Ibre) of the Getulio Vargas Foundation (FGV) and partner at BRCG, stressed that domestic issues should continue to affect the market until the political climate is minimally pacified. “Instability should continue while we are surrounded by so many uncertainties that scare investors away. In this unfavorable environment, there is no way to plan investments”, he pointed out.

Of the BRL 195 billion lost in market value yesterday by stock exchange companies, BRL 28.7 billion were for the three main Brazilian state-owned companies on the Ibovespa: Petrobras, Eletrobras and Banco do Brasil. According to Economática economist Einar Rivero, Petrobras was the company that lost the most, R$19.65 billion. Next came Ambev, with R$ 15.4 billion; Itaú, R$14.3 billion; Bradesco, R$12.2 billion; and Vale, R$10.1 billion.

The stoppages of truckers on some roads also helped to sour investors’ moods, explained Daniel Miraglia, chief economist at Integral Group. “It is one thing for them to demand a drop in the price of diesel and gasoline, which would no longer be good news, but the demands are linked to the speech the president made on Tuesday,” he said.