The federal government’s fiscal policy gained extra weight on the markets’ radar about a month ago, with the expectation of the announcement of a package to adjust public accounts and ensure that the fiscal framework formulated by the economic team itself is sustainable.
After two weeks without definitions, analysts interviewed by CNN point out that the market’s “bad mood” at being left without answers is likely to manifest itself again at the opening of business this Monday (11), with more pressure on the stock market and the dollar.
Even so, economists say, the benefit of the doubt with the government’s efforts — especially the Minister of Finance, Fernando Haddad — is still on the table.
The last few days were marked by meetings between President Luiz Inácio Lula da Silva (PT), economic team — which in addition to Haddad, is made up of ministers Simone Tebet (Planning and Budget) and Esther Dweck (Management and Innovation in Public Services) — and ministers from portfolios that may be affected by the measures.
Despite the sequence of meetings,.
“The market is always willing to give the benefit of the doubt. After all, the goal is always to make some money. But if there is no clear signal on Monday about what the package will be, market behavior will be negative”, points out José Márcio Camargo, chief economist at Genial Investimentos.
Uncertainties and volatility
On the one hand, it is pointed out that the market has been more understanding in noting the efforts of recent days and the fact that President Lula has adopted a more open stance towards fiscal review, according to Luciano Costa, chief economist at Monte Bravo.
However, there is still a mild climate in the environment.
“The exchange rate will continue to respond to the absence of news. The stock market itself is likely to be heavy, as risk perception remains high. The interest rate curve may rise, and this does not help either with risk taking or with the Stock Exchange, which is more linked to the domestic cycle and interest rates”, says Costa.
“It will still be a day of achievement, unless the government makes a decision and announces something early in the day, reversing the perception. If there are no signals throughout the week, it will be bad for risk assets.”
Daniel Teles, economist at Valor Investimentos, agrees that more satisfactory announcements should provide space for a positive movement in indicators.
“What frustrated us most was the lack of answers”, says the economist at Valor Investimentos.
For some market players, the issue is not the lack of announcement of the package, but the unpredictability of the date and progress.
“We are in that famous ‘trust and check’. I trust what the government says, but I check what is happening. The problem is that nothing concrete is happening”, says Emerson Junior, head of foreign exchange at Convexa Investimentos.
“For the investor, it is better to have a bad and predictable scenario than a good but unpredictable scenario.”
For Marcus Pestana, executive director of the Independent Fiscal Institution (IFI), what matters is the consistency of economic policy.
“There are a series of interests at stake. There are sincere concerns, but there is also a lot of speculation and a lot of gains. The market is always excited and short-term”, says the IFI economist.
Political timing x market timing
The fact is that the timing of the market and political negotiations is different, as highlighted by Pestana, from IFI.
“Brazil has been a glass half full, half empty for decades. There is good news with GDP higher than forecasts, the flow of direct investments, low unemployment. But there is worrying news such as the possibility of not meeting either the fiscal target or the inflation target in 2024, fiscal unsustainability, rising inflation and the exchange rate with the real being very devalued”, says the director of the IFI.
“We are neither in paradise as some government fans want to say, nor on the brink of the abyss a la Argentina and Venezuela, as some alarmists from Faria Lima would have us believe. The government has its decision time, but the delay has a cost in exchange rate and interest”, he concludes.
And this is where the problem reigns, according to Tatiana Pinheiro, chief economist at Galápagos Capital.
“I believe the market knows that the political timing is different. But it is a fact that the government signaled in October that an announcement regarding spending cuts would take place after the elections, and two weeks have already passed since the elections.”
If the government takes even longer, risk premiums in the market will rise and increasingly reflect uncertainty in losses, explains Paulo Gala, chief economist at Banco Master.
“It is true that the timing of the policy is slower, but it cannot take too long, as it will bring important costs, which may remain and have more concrete consequences. The devalued exchange rate generates more inflation and makes life difficult for the Central Bank, for example”, ponders Gala.
In this sense, José Márcio Camargo criticizes Lula’s stance in seeking out each minister instead of making the decision straight away.
“He and the economic team should put together a minimally reasonable fiscal policy. It is a very serious decision to negotiate with ministers”, says Genial’s chief economist.
However, Gala argues that the delay shows that the government seeks to design a more permanent and structural project, so that “if it were to release something simpler and more superficial, it would have already been done”.
Package quality
Tatiana Pinheiro lists among the measures that should be in the package the change in access rules for unemployment insurance, salary bonus and health insurance and an increase in Fundeb’s participation in the education spending floor, with the aim of generating an economy around of R$30 billion.
But what both she and other economists interviewed by CNN say is that, despite being robust, the package is still not structural enough to promote the necessary reform.
When looking at previous reforms — such as the Spending Ceiling PEC and the Pension Reform — Cristiano Noronha, political scientist at Arko Advice, told WW that the new measures should fall well short in this regard.
“I believe that [o pacote] will be robust to the point of not letting the minister [da Fazenda, Fernando Haddad] ‘in the rain’”, said Noronha.
In this case, a structural reform would be one capable of stabilizing the direction of public debt, a problem that has been present in the Executive’s accounts for years.
Pressures
The pressure from economic agents on public accounts intensified again in April with the change in the fiscal target to 2025.
As expenses and use of quasi-fiscal mechanisms grew, collections increased in August, when Haddad and Tebet began to signal that they would present a project to make the fiscal framework sustainable.
At the time, Tebet said that Haddad would have plans from “A to Z” to address the issue and that they would be presented at appropriate times.
That month, the economic team even presented a spending review project for 2025, which specifically targets Social Security, Bolsa Família and budget changes in ministries, whose expected return is R$25.9 billion.
But the assessment is that the measure has a more administrative and regulatory character than a structural one in itself, to the point of providing the necessary sustainability to the framework.
The argument is that expenditures, such as those linked to social benefits, health and education, are growing at a greater pace than allowed by the framework for expenditure in general, so that at some point there will be no more room in the budget for discretionary expenses — government investments.
The new public spending rule, approved in 2023, put an end to the spending cap. From then on, government expenses can grow between 0.6% – in periods of contraction – and 2.5% – in times of expansion – above the previous year’s revenue and with values adjusted for inflation.
Within the band, the expenses .
