Dubious signs disturb Haddad’s first 100 days – 04/08/2023 – Market

He started the tax reform debate and presented the guidelines for the new fiscal rule, addressing two urgent issues, but he acted in an erratic manner and still has not achieved what the government most wants, a stable scenario for growth. This is how most economists define the conduct of economic policy in the first hundred days of Fernando Haddad at the helm of the Ministry of Finance.

There is a stated ambition to stabilize public accounts as early as next year. The economic team took the projection for the primary result, the difference between government expenditure and revenue (minus interest), from a deficit of -2% to -0.5% this year, with the promise of zeroing in 2024. However , has not yet made it clear how it will get there. Haddad, they say, started and ended the first quarter worried about raising revenue to guarantee spending.

At the same time, he joined President Luiz Inácio Lula da Silva (PT) in questioning the conduct of the interest rate policy of the autonomous BC (Central Bank), chaired by Roberto Campos Neto.

In short, these are signs that are considered dubious and fuel uncertainty —the worst environment for the economy, say analysts.

“I had no doubt that clashes would occur, but to my surprise, they came very early, which harms not only short-term growth, but the expectation of future growth”, says Silvia Matos, technical coordinator of the FGV Ibre Macro Bulletin (Instituto Brazilian Institute of Economics from the Getulio Vargas Foundation).

Economist José Júlio Sena, also from FGV Ibre, reinforces this analysis. “The simple change of government improved the perspective in areas vital for growth, such as education, a basic item for productivity, the return of international relations, after the country was isolated, and the rescue of environmental policy, essential in economic exchanges in the 21st century”, says Sena.

“But for the economy to function smoothly, we need macroeconomic stability, and that left something to be desired at the beginning of the government, mainly because of the attacks on the Central Bank.”

The divergences, they explain, worsened the projections of inflation itself, which delays the drop in interest rates sought by the government to alleviate the credit crunch, which harms companies and families.

At the end of September, before the first round, the Focus report, which brings together macroeconomic scenarios, pointed to an IPCA, the official inflation index, of 5% in 2023. In December, after the government approved a package that increased expenses, the IPCA projected for this year rose to 5.31%,

In the most recent bulletin, released on April 3, the inflation projection for the year had risen to 5.96%.

Speeches by Lula and supporters about reviewing the inflation target, to reduce interest rates more quickly, are also affecting long-term expectations. For 2025, the market already works with an inflation of 4%, pricing the president’s speeches. Before the election, the projection for the period was 3%.

Meanwhile, the dollar does not give way. It is around R$5.25, when some economists estimate that it could already be at R$4.80. The growth rate moves slowly and even retreats in 2025 (see infographic).

Some analyze that the Treasury’s own strategy mistakes helped to sour the mood.

Within the PT itself, there are those who ask themselves the reason for the delay in appointing the two directors of the BC to which the government already has the right. The terms ended on February 28. The Treasury could have evaluated the names earlier and streamlined the Senate hearing.

Two new members at the BC would not change the monetary policy, but they could establish a more diverse dialogue, these interlocutors believe. So far, the exchange has not taken place.

Some also believe that there would be less stress if the fiscal rule —which is an official sign of commitment to public accounts— had come earlier. Haddad did not prioritize the measure, before sending tax refund initiatives.

Constitutional Amendment 126 established that the government must submit a new fiscal regime to Congress by August 31 of that year. Initially, despite having numerous proposals, including one produced by the government’s own transition group, the minister declared that the rule would be presented in the first half of the year. Then it moved to April.

Reducing the term only became a priority when, shortly before Carnival, the discourse against high interest rates incorporated the idea of ​​ousting Campos Neto. The Treasury rushed to try to publicize the rule before the Copom (Monetary Policy Committee) meeting on March 21st and 22nd. There was no time.

The rule came on March 30, presented in a PowerPoint. The date of submission of the bill is still uncertain. It is not guaranteed to come the week after Easter.

“The evolution of the agenda was bad. His first objective, from the beginning, should have been the fiscal rule”, says economist Elena Landau. “But he put the fiscal rule in the background, and the fact of having done that made us waste a lot of time. And he even entered the Central Bank’s discussion. A big mistake.”

The Treasury’s coming and going is frustrating most of the so-called non-liberal PT supporters and economists.

“The Treasury is hoping that, with the tax reform and the new fiscal rule, it will create an environment to increase private investment, and not government spending. That is, it signals the option for a fiscal policy that, I understand, will be contractionary “, says Simone Deos, Senior Researcher at Cebri (Brazilian Center for International Relations).

According to her, despite the market’s outcry, Haddad opted for a liberal strategy, with some progressive touches, but without the necessary components for what matters, fostering economic growth.

“Investment only occurs when companies have clear expectations that they are going to sell more and earn more, but at that moment, companies are disintegrating and there is no prospect of growth”, she says. “The investment will not come from signals to the financial market, but from a plan in which the government and private companies can invest together.”

The senior economist in the Macroeconomics area at LCA, Bráulio Borges reinforces that Lula 3 takes place in a very particular political context, which contributed to tension the environment in that first moment.

Still in the transition, it was necessary to negotiate with Congress to expand the Budget with a PEC (proposed amendment to the Constitution). There, the government, before taking office, already exposed itself, understanding the need to change the spending level, which rose from 17.5% of GDP to 19%.

In January, a second event came, which changed Lula, says the economist. The discourse of inclusion and coalition has moved further to the left. “When we look at the impact of politics on the economy, and vice versa, it is impossible not to consider the events of January 8”, says Borges.

“The intent has shaped President Lula’s public discourse, and some of those around him, and I think this may explain the rise in tone against the Central Bank and particularly against Campos Neto.”

Economist Felipe Salto says that, despite all the setbacks, it is necessary to consider the net balance of the 100 days at the Farm as positive.

“We have the fiscal framework before the deadline, which was a big obstacle to being transported. One of the guys who understands the most about tax reform, the [secretário da Fazenda] Bernard Appy, is already working. Haddad set compensation for the states on the issue of fuel, which was a federative node. These are advances”, says Salto.

“I am going to quote Senator José Serra here. He remembers that, in mathematics, the shortest distance between two points is a straight line. In politics, however, it is a sine curve”, he jokes.