PEC ‘Kamikaze’: why it can harm and not help the Brazilian’s pocket | Economy

In practice, analysts say that the proposal – originally named ‘Kamikaze’ by the Minister of Economy himself, Paulo Guedes – leaves the management of the country’s public accounts even more nebulous, which could lead to a scenario already faced by Brazil in other countries. occasions. There may be a worsening of international investors’ risk perception with the Brazilian economy, leading to a devaluation of the real, which has the potential to provoke further inflation.

In other words, a proposal designed to bring some relief to the population’s pocket may end up worsening the financial situation of families. The ‘Kamikaze’ PEC foresees, for example, an increase in the value of Auxílio Brasil from R$400 to R$600 and the creation of a R$1,000 “voucher” for self-employed truck drivers by the end of the year.

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Senate approves PEC that provides for a state of emergency to expand social benefits

Senate approves PEC that provides for a state of emergency to expand social benefits

With a scenario of even more pressured inflation, the tendency is for interest rates to remain at high levels for longer, which causes a brake on company investments and job creation in the medium and long term.

And the picture is already quite difficult. The Broad National Consumer Price Index (IPCA) — the country’s official inflation — has been above 10% since September last year, and the basic interest rate (Selic) reached 13.25%, the highest since 2016. .

The evolution of the Selic rate

Since 2017, in % per year

Source: Central Bank

“The Central Bank has faced increasing difficulty in bringing inflation to the target. And, as fiscal risk grows, this chain of effects worsens and the task becomes increasingly difficult”, says Christopher Galvão, an analyst at Nord Research.

“What we should be discussing is spending control in search of sustainable economic growth”, he adds.

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First reaction: dollar rises strong

The first signs were given by the exchange this Friday (1st). The dollar closed up 1.68%, quoted at R$ 5.3206. The US currency is at its highest level since February.

And one of the drivers of Brazilian inflation since the arrival of the coronavirus pandemic has been precisely the devaluation of the real.

Food producers, for example, prefer to export their products at a valued dollar than to sell to national industries. The effect is a decrease in domestic supply and an increase in prices.

For fuels, the logic is similar. As the barrel of oil is quoted in the US currency, it gets more expensive as the real gets weaker.

And, since the policy of international price parity (PPI) was introduced by Petrobras in 2016, the market has tried to match the price of gasoline at the refinery with the international value. That is, the readjustments are the result of fluctuations in oil prices and exchange rates.

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Understand Petrobras' pricing policy

Understand Petrobras’ pricing policy

In June alone, the dollar rose more than 10% against the real. Part of this result must be attributed to the monetary tightening in the United States. To fight inflation, the Federal Reserve (US central bank) started an interest rate hike there.

The increase in rates takes dollars from emerging economies and brings them back to the country, because there are US Treasury bonds, the safest investments in the world.

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US promotes historic interest rate hike to fight inflation

US promotes historic interest rate hike to fight inflation

But, on the other hand, the devaluation of the real also suffers from the effects of an accentuation of the crisis in public accounts, a frustration of the country’s growth expectations and a continuous political instability in Brasilia, which make international investors flee the country.

The PEC approved this Thursday, which intensifies government spending, has the potential to worsen this impression and fuel a new surge in the dollar.

Another problem for public accounts

Since last year, some measures by the Jair Bolsonaro government made it clear that the election year would be ahead of the fiscal crisis among the priorities.

In December, the financing mechanism of Auxílio Brasil, a new social program that replaced Bolsa Família, took a bad turn for the financial market, outside the spending ceiling. The government worked to approve the PEC for precatories, which, after being passed through Congress, released R$106 billion for spending in an election year.

This “dribble” on the ceiling was even taken up by Minister Paulo Guedes, to whom market agents trusted the imposition of an agenda of strict control of the country’s finances.

Since then, the real has gone through a period of appreciation. Investors interpreted the country as being well positioned for its commodity companies as the war in Ukraine unfolded.

In April, the American currency reached R$4.60 twice. But the interest rate hike by the Fed, the expectation that global economies will enter recession and new agendas that advanced in Congress against the country’s fiscal situation reversed the trend.

Tenax Capital’s chief economist, Débora Nogueira, recalls that attempts to solve the population’s financial squeeze by distributing resources, without a compensation recipe, tends to carry strong inflation for longer.

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Understand the fiscal challenges Brazil will face in 2023

Understand the fiscal challenges Brazil will face in 2023

“Brazil was heading towards a year of primary surplus, but it will have an important waiver of revenues. It is a huge challenge in terms of collection to avoid a sudden increase in public debt”, he says.

About Abhishek Pratap

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