Approval of the tax may reinforce the drop in interest rates – 07/07/2023 – Market

The approval of the Tax Reform in Congress could reinforce the movement that started a few weeks ago with a fall in the futures interest market, which embodies the expectations of financial agents for the direction of monetary policy. Further declines in future interest rates, in turn, could fuel the bullish potential of stocks on the Stock Exchange.

The text passed through the Chamber of Deputies this Thursday (6), and now goes to the Senate.

Fixed income analyst at Nord Research, Christopher Galvão says that tax reform is essential for the sustainable economic development of the country in the long term.

He says that the current tax regime causes several distortions in the system, with inefficient allocation of resources by companies, legal insecurities and misdirected incentives that end up stimulating unproductive projects.

This picture, says the analyst, drives away investments and disfavors the country’s potential growth.

In the evaluation of specialists, the approval of the Tax Reform could cause an additional economic growth of 12% or more in 15 years, which is equivalent to R$ 470 more income per month for each Brazilian.

The Nord analyst says that, while the Tax Reform has the potential to increase economic growth in the coming years, the fiscal framework, also under discussion in Congress, brought an improvement in the expected trajectory of the federal debt.

“We have already had a significant drop in interest rates [futuros] in the long term, and the approval of the Tax Reform could be one more factor contributing to this downward movement, since we would have the prospect of a more sustainable path for the relationship between debt and GDP”, says Galvão.

In recent weeks, banks and brokerages have adopted a more positive view of the performance of the Brazilian Stock Exchange in the coming months, with the drop in interest rates being one of the main catalysts for the expected performance ahead.

Chief economist at Suno Research, Gustavo Sung adds that the adoption of a system with fewer distortions, greater efficiency in the allocation of resources and more transparency should lead the country to a path of sustainable growth with increased productivity.

“With the growth of productivity and economic activity, the country’s collection would be greater and more efficient, helping to stabilize the debt. And the fiscal risk, the country risk, the structural interest rate, among others, would fall. Brazil could enter a virtuous cycle,” says Sung. “The new system is not ideal, but it is an adaptation to the Brazilian reality”, she says.

Partner at Ártica Asset Management, Ivan Barboza assesses that, in general, the impact of the Tax Reform tends to be positive for the markets, but unevenly distributed across sectors.

“Services and businesses that are very dependent on tax benefits may suffer, while businesses linked to goods and products tend to be favored”, says Barboza.

The Ártica partner says that the tax reform should have a positive impact on the economy for two main reasons.

One is the simplification of the tax system, which will greatly reduce companies’ costs with tax assessment and collection procedures and should reduce the number of litigation related to tax issues. The second is to bring more equality to taxes levied on different economic activities.

“The latest version of the proposal includes modifications that seem to have come about through pressure from specific groups, so it seems that accommodations have already taken place to obtain greater political support. So, I understand that there is a good chance that the reform will be approved in the near future”, says Barboza .

Review and dehydration of the reform are risks on the market’s radar

Sung, from Suno, claims that the government, states, municipalities and sectors of the economy should make a new Federative Pact to improve the current reform and approve a text that does not generate noise and distortions in the future.

“The worst thing is to approve a reform that will have to be revised in the coming years, the economic and political cost will be enormous”, says the expert.

He claims that, although the discussion between federal entities and sectors of the economy is more mature, it will be necessary to sew an agreement that seems, at the moment, still distant. “In any case, we believe that the project has a great chance of being approved in 2023.”

Chief Economist at Mirae Asset Wealth Management, Julio Hegedus Netto recalls that a number of states took a stand against the reform, fearing losses in revenue.

“The biggest problem is regional compensation, with many states opposed by the prospect of loss of income and investment, given the perspective of the end of the ‘fiscal war'”, says the economist.

“It is a risk for the reform to end up being approved completely out of character”, says Hegedus Netto, adding that if the reform on consumption does not become viable due to the clash between the states, the tendency will be to move forward with changes in taxation on income.