André Esteves: tax framework changes market level – 04/12/2023 – Market

Chairman of the board of directors and senior partner of BTG Pactual, André Esteves says he views the government’s presentation of the fiscal framework positively.

According to the banker, the proposed new fiscal rule removes the risk of the country moving towards the Argentine model, with an unsustainable debt trajectory, and tends to contribute to changing the level of the Brazilian market in terms of asset prices on the Stock Exchange , in the dollar or in interest.

“I liked the fiscal framework. And I think it has some subtleties that, for me, are even more important than the measure itself,” said Esteves, during an event promoted by BTG Pactual this Wednesday (12).

First, he said, it is a framework that suggests that the country is moving towards a moderate primary surplus, around 1% in its stability.

“We got there in a transitory way, but that fits within our budgets, and perhaps with a better fiscal result for this year than the market expects”, said the Executive. “So, in and of itself, it has an objective and consequence of taking a tail risk of Brazil moving towards Argentina or something like that,” he added.

Esteves went on to say that “even more important news” was President Luiz Inácio Lula da Silva’s support for the fiscal framework project.

In his evaluation, the launch of the set of fiscal rules, with the president’s support, is a “rearrangement in a direction most expected by the markets there in the pre-election period, of discipline, of judgment.”

“I think this explicit support from the president, giving the green light for the launch, and in a more explicit way, at the ministers’ meeting, praising Minister Haddad, I really liked it, and I think that, in fact, that’s what is behind yesterday’s market improvements [terça-feira] and the market today will improve again in Brazil”, said the chairman of the board of BTG Pactual.

He also mentioned a third subtlety that he sees in the scope of the announcement of the fiscal framework, which are the changes from the launch, with the economic team being open to listening to suggestions for improvements coming from market agents. “The Ministry of Finance knows how to listen. This is an enormous quality.”

According to him, the combination of mitigating the risk of an unsustainable debt path, with the support of the president and the receptivity of the economic team to criticism of the initial project, will make the market change levels in Brazil. “And today will be another round of improvement.”

Tightening of monetary and credit conditions because of Americanas could lead to an anticipation of interest rate cuts, says Esteves

During the lecture, Esteves also addressed the credit scenario in the country, pressured by the BC (Central Bank) interest rate hike and by corporate issues such as the case involving Americanas, which increased the restrictive posture of banks in offering to customers.

“I’m in the group that [avalia] that the grip [no crédito] is above that expected by the natural development of the tight monetary policy”, he said.

“With interest already at 13.75%, we had the episode of Americanas, which created a natural restriction in the capital market”, added the banker, noting that, with the development that took place in the capital market in the country over the last five years, and the stoppage of operations due to the case involving the retailer, the banks were not able to absorb all the demand coming from companies in search of financing.

“Credit is not being restricted within the banks’ balance sheets. It continues to expand, the banks are prepared for that, but they are not prepared to absorb everything that was being done by the capital market. Something was left out, and therefore this is creating some additional tightening to the natural credit consequence of tight monetary policy.”

According to the BTG Pactual executive, the BC is following the evolution of the scenario, even “because it seems to me that there is no doubt about this diagnosis.”

He also said that the monetary authority has two paths to follow. One of them is to adopt “macroprudential” measures like those taken during the pandemic, providing lines of credit for financial market agents to buy debt securities (debentures) traded in the market, fostering liquidity in the system.

A second path, “which seems to be what is being adopted”, continued Esteves, is for the Central Bank to recognize the tightening of monetary and credit conditions and signal an anticipation of the beginning of interest rate cuts.

“At this moment when they are pressuring me to lower interest rates, by making this credit crunch stronger, I [BC] naturally I manage to anticipate my fall in interest in a healthy way. I think the BC is adopting this second path, which is also technically valid and also technically correct”, said Esteves.

“We may experience a little more anxiety, but this brings closer the eventual drop in interest rates, which should happen throughout the second half of this year”, amended the banker.

Esteves defends change in the way inflation is monitored by the Central Bank

The bank executive also commented on the discussions surrounding a change in the inflation targeting regime, a topic that President Lula has already addressed on a few occasions.

“There is a discussion that has been going on for some time, which has nothing to do with this government or even with this management of the Central Bank, [que é] whether our system of targets should stop being Gregorian”, said Esteves.

The banker stated that most countries that adopt an inflation target do not work with the Gregorian model like Brazil, which establishes a fixed number for each year. In these countries, such as the United States, the model adopted is to set an inflation target for the windows over the next 12, 24 or 36 months, that is, within a relevant time horizon.

“The Central Bank at some point changing from Gregorian to non-Gregorian has nothing to do with the anguish of the moment, I think it is appropriate, and, if that is done, it is also natural that our widening band expands marginally, because the volatility of the non-Gregorian environment is also marginally larger.”

Esteves said the discussion is welcome, although there is some concern that it is taking place in an environment of high anxiety about the monetary policy cycle.

Still within the discussions on inflation targets, he added, the highest level of inflation on a global scale must also be considered, with several countries facing increasing inflationary pressure in the wake of efforts to fight the pandemic, which generates a natural contagion to other countries like Brazil.

“We are having a debate at the bank about unanchoring expectations [de inflação] which went from 3% to 4% in the medium and long term. We, the market, started to reprice 4%. But there are two components to it, one component is this cacophony at the beginning of the government that created uncertainty in expectations, but there is a second component, which in fact is not exactly discouraging, maybe it is even an anchoring, which is imagining that you have an environment of higher global inflation, and that 4% is more correct than 3%, at least for the short term”, said the banker.

“So, something like the Central Bank accepting a transition from the current environment to our target of 3% I think it is also technically acceptable and I would even say welcome”, said Esteves, adding that, if in the United States inflation is high and above the target, it will be very difficult and costly for the Brazilian society for the BC to act to achieve the established target.