The political crisis driven by President Jair Bolsonaro’s constant friction with other powers has contaminated the real economy in such a way that not even the recent truce signaled by the Chief Executive should be enough to contain the “domino effect”. By fomenting the belligerent climate, the president extended the devaluation of the real against the dollar, making food and fuel more expensive, and put on the radar of economists the prospect of higher interest rates and more timid growth in 2022.
The political turmoil is added to other crises: fiscal, health, energy and even supply, due to the stoppage of truck drivers and also the lack of some supplies caused by the covid-19 pandemic. On the solutions side, the government and Congress are slipping into the doldrums and have not yet found a solution to make the 2022 Budget, today one of the main sources of uncertainty, viable.
Nobody knows yet what the real size of Auxílio Brasil, successor to Bolsa Família, will be, and how much of the bill of R$ 89.1 billion in judicial debts (precatório) will actually be paid next year. Without being able to do the math, investors place a risk premium to agree to put their money in the country, leading to a rise in future interest rates. A high interest rate cools the economy and harms credit and the return of employment.
Uncertainty is also reflected in the dollar. After the protests on September 7th, the US currency was worth R$5.32, but fell below R$5.20 when Bolsonaro’s friendlier statement was released. But, on Friday, the exchange rate rose again and closed at R$ 5.26. The rise of the dollar accelerates inflation – a movement that the president of the Chamber, Arthur Lira (PP-AL), called “negative looping”. On Friday, Bolsonaro himself admitted that his speeches had been having an effect on the exchange rate. “If the dollar soars, it influences the fuel,” he said.
For economist André Braz, coordinator of price indices at the Brazilian Institute of Economics (Ibre) of the Getulio Vargas Foundation (FGV), the dollar should be below R$ 5, but the combination of crises prevents this barrier from being broken now. “The letter, although it has improved the mood of the Exchange, will not reverse this climate of uncertainty. Because the Bolsonaro electorate itself will apply pressure, they want it to maintain its speech. This does not allow the uncertainty to diminish.”
The impact of the dollar reaches the population very quickly, because domestic food consumption competes with exports. Although Brazil is one of the largest producers of soy and meat in the world, the rise in the price of these products on the foreign market leads farmers and ranchers to sell to those who pay the most. It also affects fuel prices, which are still impacted by the international value of oil.
Braz also observes that the Brazilian economy is still highly indexed, that is, today’s inflation serves as a reference to correct prices in the following periods. That’s how it is with salaries, rents, school fees and health insurance. Therefore, the movement observed in 2021 already contaminates expectations for next year’s inflation, generating the expectation of a firmer performance by the Central Bank – that is, an even higher interest rate.
At least half of inflation in 2021 is determined by energy components: electricity, piped or bottled gas, and fuels. Many are driven by the dollar, but also, in the case of electricity, by the water crisis that threatens supply and led the government to institute an additional charge. And energy affects other products or services.
“A mall spends on lighting, regardless of whether it’s day or night. It also spends on refrigeration all the time, and this shopping expense goes to the tenants’ condominium, who have to pass it on to the final price”, exemplifies Braz.
For Solange Srour, chief economist at Credit Suisse Brasil, the Brazilian trade surplus and the abundance of resources in the hands of international investors should play in the country’s favor, but this is not what is being observed. “The interest curve remains under pressure and the exchange rate could be much better due to the fundamentals of the trade balance and the very liquid global environment,” he says.
Solange points out that uncertainty also hinders the control of expectations, which has affected inflation itself. According to her, the tensions that raise Brazil’s risk premium will reach the real economy via credit, because the long-term interest rate is above double digits for 2025.
For a truce in this environment, she recommends the vote of the PEC of the precatório, with installments of the judicial debts, and the definition of the new Bolsa Família, in order to reduce the uncertainties about the public accounts of the Country. But the economist recognizes that no relief will last a long time.
With the successive revisions of the projections to around 1.5%, economists are already talking about the possibility of a fall in the Gross Domestic Product (GDP) in 2022 and speeding up estimates for inflation, which could force the BC to weigh its hands on interest rates , further affecting the economy. The scenario can be aggravated by an eventual energy rationing.
For the chief economist at XP Investimentos, Caio Megale, the fiscal uncertainty with which the Budget vote can come out goes directly to future interest rates, affecting the financing conditions of companies and growth prospects. Megale points out that companies, when elections come, naturally step on the brakes. The problem is that this movement came much earlier.
“What would be expected is that this volatility would happen four, five months before, and not a year. It’s too long for a tense environment,” he says.
Economist André Roncaglia de Carvalho, from the Federal University of São Paulo (Unifesp), says that a way out of this accumulation of problems is not trivial because the environment is “messy” without the government offering a fiscal plan. According to him, as a change in Petrobras’ pricing policy or food regulatory stocks are not on the table, to help control inflation, the BC will have to use the exchange swap auction offer (type of contract linked to the exchange rate) to contain the depreciation of the real.
In the opposite direction, the chief economist of CNC (National Confederation of Commerce), Carlos Thadeu de Freitas, says that the Brazilian economy is robust, despite the “political noise”. He admits that there are signs of a slowdown, but emphasizes that this does not mean that the economy will go downhill. “The economy remains anchored on favorable results. The rest is negativity and speculation by investors who are not willing to lose.”
Information is from the newspaper The State of São Paulo.