Luiz Fernando Figueiredo cites fiscal control, the rise in interest rates and the impoverishment of the population as obstacles to rising prices; shocks to the economy should last until the 1st half of 2022
Although economic uncertainties overshadow the trajectory of inflation and do not show clear signs of decline in the short term, Brazil still has all the tools to bring price variation down over the next few months, in the opinion of Luiz Fernando Figueiredo, former director of central bank and CEO of Mauá Capital. The optimism is justified by the improvement of public accounts, despite a reform agenda less than ideal, and the firm action of the monetary authority in raising the basic interest rate as far as necessary, as the current BC president, Roberto Campos Neto, has already reiterated. “If we don’t go astray in fiscal matters and the Central Bank does what needs to be done, inflation will return to the target”, he says in an exclusive interview to the website of the Young pan. The deceleration of Broad Consumer Price Index (IPCA), the official indicator of Brazilian inflation, should also be a reflection of the impoverishment of the population, who, with less income, cannot provide the market with breathing space to maintain the price rise. This phenomenon is already beginning to be noticed in the economy with the strong retraction in retail in August, the worst result for the month in 21 years. “We have already looked at the cooling of demand in several sectors. It’s the harbinger for further on we will have a fall in inflation.”
The pressures that brought the IPCA to 10.25% in the 12-month accumulated in September – the most expressive record since February 2016 – should continue to haunt the scenario until the end of the first half of 2022. The forces generated by the asymmetric reopening of the economies around the globe, will still come from the increase of commodities energy, but with a smaller caliber than currently recorded. “We will already be much more within the normal range. The whole world will have already gone through this temporary mountain of price increase caused by the disorderly return”, says Figueiredo. If monetary policy shows signs of bringing more tranquility to the country, the same cannot be said of the environment in Brasília. The worsening of institutional crises and the political polarization with the upcoming elections should continue to fuel the country’s risk perception, deteriorating expectations of economy growth in the next year. Mauá estimates that the Gross Domestic Product (GDP) grow just 1.5% in 2022, below the federal government’s 2.5% forecast. “Looking at today’s situation, anything more than 2% is above normal optimism,” he says. Check out the main excerpts from the interview below.
Did inflation peak in September or do you still have the strength to continue rising? It is very difficult to bet that inflation has reached a plateau and will stop there. The question is: are the conditions for inflation to cool over time present? They are. Mainly for two reasons. The first is that, as much as you fear a very disastrous fiscal scenario, the situation has improved, not worsened. We hardly ever go to something of fiscal irresponsibility. The second is that we have a Central Bank that is super vigilant. The interest rate is going up 100 points at every meeting, which is a big and important step, and he’s saying he’s going to do what he needs to do. If we don’t go astray in fiscal terms and the Central Bank does what needs to be done, inflation will return to the target. The shocks we had were big, not only in Brazil. Here we had some additional shocks, such as the water crisis and the depreciated exchange rate. But this readjustment in the return to normality is generating inflation around the world.
With double-digit inflation, how far does the Central Bank have to raise interest rates? When we look at today’s data, it would need to increase to 8.5%, but at each meeting it recalibrates. if if we have positive surprises, that is, lower inflation than expected, the rate could go below 8.5%. If the surprises are negative and we continue with high inflation, it will rise further, it may have to reach 9%. We don’t have enough income for the inflationary process to continue strong. There was a big rise in prices, but income did not keep up. We have already seen a cooling of demand in several sectors. It’s a harbinger of falling inflation later on.
Will the rise of up to 9% per year in the Selic rate harm the economic recovery? Yes, it can get in the way. But if the central bank does that and inflation really does converge, then it can ease monetary policy and lower the interest rate to alleviate this pressure that is hampering the recovery. But now inflation needs to be taken care of.
What are the expected inflationary shocks for next year? The whole world, until two months ago, was in the process of accelerating growth, with prices of commodities up there and a lot of supply problems. When we came back from the pandemic, it wasn’t in a linear and homogeneous way. It’s a temporary process, but it’s not over yet. Some shocks we’ve had so far, for example, from commodities, are already starting to cool down, since the world is no longer in the process of acceleration, on the contrary, it is in a certain accommodation. These shocks should continue with us and only ease from March or April of next year.. Around here, those who understand the water crisis are more excited. The chance of rationing is less, so it may be less severe than expected. A series of shocks present this year are expected to cool off over the next year, some more early, some more towards the middle. Anyway, we will already be more within the normal range. The whole world will have already gone through this temporary mountain of price increases caused by the disorderly return.
How does the high Selic impact the financial market? Selic is just one factor. We have a very negative perception of what has happened in relation to Brazil, such as the institutional and political crisis, plus the fiscal risk. This, more than Selic, has impacted assets in general. If you compare the Brazilian stock exchange with that of emerging countries, ours has a fraction of them, that is, our prices are lower. Our exchange rate, if not the most, is one of the most undervalued in the world. The yield curve itself is at a very high premium level. When you look at the set of Brazilian assets, they are highly depreciated. It’s a good time to invest in risky assets, but always with caution. They already have all these uncertainties of the negative perception that we have about what is happening in their prices.
Is it time to invest in fixed income or buy stocks? The type of asset and the volume of risk depend on how much the stomach will take. This is the time to not concentrate investments in just one type. It is time, without leverage, to slightly increase the risk level of investments on the Stock Exchange and in longer-term fixed income.
Are the government’s projections for the economy in 2022 out of touch with reality? They are too optimistic. Mauá’s forecast is for growth of 1.5%, and I wouldn’t say we are the most optimistic, but we are not the most negative. Looking at today’s situation, anything more than 2% is above normal optimism.
How does this negative feeling impact the economy? Depreciated assets help explain this lower growth. It is the term called financial conditions. When the stock market is too cheap, the company cannot make an IPO [abertura de capital] to make investments. The very high interest makes the installments more expensive, so people don’t buy. When assets are depreciated, there is a direct impact on growth and the economy cools down. Assets can always get more pressured, but it seems like a situation with little chance of getting worse, and more to get better.
How long does this climate of pessimism last? Very difficult for the perception to change if we have Lula or Bolsonaro as the most likely [como preferência nas eleições]. As no one expects anything positive, not happening the negative is something that improves the perception. A major change cannot be expected as long as the possibility of one of these two candidates prevails. If you have the third way, a center path is more likely to shift the perception a lot to the positive side.
Can the government do anything in the short term to change this? Is very difficult. When looking at the economic side, they had advances from the fiscal point of view, and frustration with structural advances. These advances ended up being compromised by the pandemic itself, which changed the agenda from structural to emergency, but there is frustration with the privatization and deregulation process of a series of sectors. Minister Paulo Guedes said that at the beginning he had 95% of the agenda shared with the president, and a few months ago it was 65%. I don’t know how it is today. Either way, it’s a more impoverished agenda. we have two reforms taking place in Congress, which are relevant, but not good. The tax, which the government sent, is a positive reform, but very small. The chance of passing Congress is 50%. And the administrative, although it has gained fiscal over time, people who understand functionalism say that it worsens the situation from a structural point of view. She’s not dead, but with a slim chance of passing. It is better not to pass it than to pass a bad reform.