The 5-year CDS (Credit Default Swap) – which measures Brazil risk – rose 94 points under the Jair Bolsonaro (PL) government. With 6 months left for the end of the 1st term and 4 months before the 1st round of the 2022 Elections, the indicator reached 300 points.
This mark has not been reached since May 2020, when the uncertainties of the covid-19 pandemic prevailed in the financial market. The indicator measures the country’s level of confidence and risk perception. The higher the score, the greater the risks.
The financial market assesses that there is a worsening of fiscal risks, mainly with the PEC of Fuels, which creates a state of emergency and releases R$ 38.75 billion for the federal government to pay outside the spending ceiling, the constitutional amendment that limits expenditures public.
The main Latin American countries also suffered from the worsening prospects of the international scenario. The environment creates a risk aversion scenario, mainly impacting emerging markets. Furthermore, the war in Europe damages the world’s production chains.
In Argentina, country risk rose 889 points from December 2018 to today. In 2022 alone, the increase was 455 points. Chile (+38 points), Colombia (+38 points), Mexico (+79 points) and Uruguay (+92 points) also registered higher risks this year, but at lower levels than Brazil, which advanced 99 points.
With 3 and a half years of government, Bolsonaro has indicators to celebrate and others to worry about. One of those playing against the president is inflation. The IPCA (Extended National Consumer Price Index) rose 11.73% in the 12-month period up to May. It is far above the center of the 2022 target of 3.5%. The president of the BC (Central Bank), Roberto Campos Neto, said on Monday (June 27, 2022) that the worst moment of inflation in Brazil is over.
The BC (Central Bank) has already admitted that it will not be possible to bring the rate to the target ceiling of 5%. The president of the monetary authority will have to send a letter for the 2nd consecutive year with explanations.
The rise in prices – pressured by energy, fuel and food – is not unique to Brazil. But the impact on families’ pocketbooks is a determining factor for Bolsonaro, who is at a disadvantage in the voter intent polls. Power Date in relation to former President Lula (PT).
When Bolsonaro took office, inflation was 3.5%, or 8.2 percentage points lower than the current level. The INPC (National Consumer Price Index), which readjusts the minimum wage and the floor of social security benefits, rose 8.47 percentage points in the same period.
To stop the advance of inflation, the BC increased interest rates. The basic rate, the Selic, reached 13.25% per year in June. The monetary authority has already indicated that it will rise to 13.75% at the August meeting.
Bolsonaro arrived in government with the Selic rate at 6.5% per year. In the pandemic, to stimulate economic activity, it dropped to 2%. But it raised to the current level to control prices.
The commercial dollar is also at a very different level from when Bolsonaro sat in the chair at Palácio do Planalto. In December 2018, it was at R$3.87. Today it is at R$ 5.19, an increase of 34%.
The government’s positive indicators are the labor market numbers. The IBGE (Brazilian Institute of Geography and Statistics) showed that the unemployment rate dropped to 10.5% in the quarter ended in April. This is the lowest amount since the Dilma Rousseff government, in early 2016.
Other indices also show improvement in the labor market. Underutilization represents the number of unemployed, those who work less than they could or who did not look for a job despite being available. The underutilized rate dropped from 23.9% (December 2018) to 22.5% (quarter ended April 2022).
Economic activity also improved. Brazil’s GDP (Gross Domestic Product) is higher than that recorded in 2018. The economy fell by 3.9% in 2020 because of the covid-19 pandemic and isolation measures. But it recovered in 2021 and is still growing in 2022.
The main sectors resumed, with the exception of industry. Services and commerce are at levels higher than when Bolsonaro took office.
On the other hand, public debt was above the level of December 2018. It was impacted by fiscal stimulus policies in the pandemic scenario. It should suffer effects from the new extra-ceiling spending measures. Brazil can pay more interest on its debt as interest rates rise over the long term.