Brazil’s financial market plummeted this Friday after Economy Minister Paulo Guedes announced on Thursday his decision to put aside a plan to control fiscal spending, a sacred thesis for investors. The São Paulo Stock Exchange closed with a fall of 2.94% – the worst performance in 11 months – after Guedes opened a debate in Brazil about his intention to exceed the debt ceiling planned to finance the Auxilio social aid program Brazil. Four secretaries of the Ministry of Economy, including Bruno Funchal, responsible for the special portfolio of the Treasury and Budgets, presented their resignation this Friday, a day after Guedes’ announcement.
The social spending ceiling is a consensus that has guided the country in the last five years, since the last of the Workers’ Party in power. The minister’s announcement had a negative impact on the country’s main economic indicators. B3, as the São Paulo Stock Exchange is called, reopened lower again on Friday. For its part, the dollar reached 5.70 reais on Friday due to the possibility that the Bolsonaro government does not comply with the commitment acquired when it came to power not to touch the spending ceiling. This limit was created during the government of Michel Temer (2016-2018), as a fiscal antidote to put Brazil’s accounts in order.
The minister’s idea is to exceed that threshold to pay debts, including those known as precatorio —Which must be paid by court decision— and which expire next year, and the new social program aimed at families in vulnerable situations. The matter had been the subject of debate for several days in Brazil, where the news speculated about the launch of the plan this week. Investor fear was confirmed on Wednesday and caused markets to turn around. The last Focus Newsletter, which brings together the weekly projections of more than 100 financial institutions in Brazil, raised its inflation forecast for 2021 for the 25th consecutive week, which is now projected at 8.45%.
On Wednesday, Guedes mentioned the possibility of spending 30,000 million reais (about 5,300 million dollars) above the spending ceiling to guarantee support for families affected by the increase in the costs of basic food products. The minister also raised the possibility of advancing the revision of the spending ceiling, which was scheduled for 2026. For economist João Leal, doing so will set a dangerous precedent that will worsen an already delicate situation. “If it increases 30,000 million reais to the ceiling, there is room and pressure to increase it,” he warns.
The deputies, who are already with their sights set on next year’s elections where Bolsonaro will seek a new term against, predictably, former President Lula da Silva, have shown their interest in changing the rules. On Thursday night, a House committee approved a project to increase the gap in the accounts, which would give the Government scope to pay its debts (those of precatorio), with another 40,000 million reais outside the spending ceiling.
Leal believes that that change in the spending ceiling could be an incentive for state governments to do the same, bringing that threshold down for future governments. “This only increases the uncertainty in the face of galloping inflation and a very strong contraction of the economy,” he adds.
Fear of an inflationary spiral
There is also the fear that Brazil will enter a vicious circle in which the money that is injected into the economy will increase the demand for consumer goods and, consequently, inflation. Through the Auxilio Brasil program, the government intends to pay 400 reais per family (about $ 70) per family, more than the current Bolsa Familia social aid project, and the business sector is not ready to meet this growth in demand.
The money would be paid from November to millions of families who are experiencing economic difficulties due to the pandemic and inflation that accumulates double digits in 12 months. “The average for Bolsa Familia was 192 reais and many people received 40, 60, 80 reais a month. We have agreed that the new BF [ como se denomina al programa Auxilio Brasil] it will be 400 reais for everyone, without exception, “said President Jair Bolsonaro at an event in northeast Brazil on Thursday.
This injection of cash will be very welcome for Brazilians who are starving in the midst of the crisis and for the economy in general. But, without a long-term plan, and given the shortage of several products – due to problems with logistics chains due to the pandemic – prices could rise even more. “Everybody wants there to be social benefits. The problem is how it is being planned, without responsibility ”, says Leal. According to the economist, the uncertainties generated by the government’s economic policy weigh on the decisions of companies when making new hires or investments on the eve of an election year. “Right now, companies do not make decisions, they wait to see the guidelines of the next government.”
To change the ceiling, it would be necessary to work on a Proposal to Reform the Constitution (PEC), which would go through the House and the Senate. The proposition still needs to be voted on in two rounds by the House Plenary before going to the Senate. The president of the Senate, Rodrigo Pacheco, said on Thursday that, if approved, the measure will be evaluated by the senators with “the greatest possible hurry,” but he avoided taking a position on this alternative and stressed the importance of adapting the social program to the ceiling of spending.
This is not the alternative considered by the Government’s economic team. Guedes proposed the authorization of an extraordinary loan of 30,000 million reais for Auxilio Brasil, which would avoid an even bigger hole in the ceiling. The minister acknowledged, however, that the decision will be political. And the instability generated by the news sets the tone for official difficulties.
In practice, the minister contradicts the speech that he himself defended from the beginning of the Government and with which he won the unrestricted support of the market. Exhausted by rising inflation and hesitation to pay court orders, the minister is now expanding his list of moves criticized by investors increasingly skeptical that he will be able to put the country on the path to a sustainable recovery. The minister is already in the limelight for keeping his money abroad, as the journalistic investigation of the Pandora Papers, published by this newspaper, while Brazilians are exposed to economic instability. The shortage of raw materials sent prices up for many products, both in the manufacturing and services sectors. The outcome of these policies will be measured in the 2022 presidential elections.
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