Enchantment of the financial market with Minister Haddad is over

The charm of the so-called Faria Lima – the avenue in São Paulo that brings together the offices of the main banks and brokerages in the country – with the Minister of Finance, Fernando Haddad, is over. The fleeting passion lasted only four months: soon after he had overcome the initial suspicions of his nomination, he came to be seen as a positive counterpoint to the postures of President Luiz Inácio Lula da Silva (PT), seen as threatening to economic stability. In mid-August, however, the situation changed, with the total loss of credibility in its fiscal targets. Unable to provide security for the evolution of public accounts, Haddad and the government distanced themselves from the financial market and began to depend even more on Congress, putting their own governability at risk.

After leading new clashes with the mayor, Arthur Lira (PP-AL), the main guarantor in Congress of a reformist agenda for the economy, and suffering defeats in recent votes in the interest of the government, Fernando Haddad became the target of a growing disbelief about its commitment to zeroing out the Union’s deficit by 2024. This loss of prestige before investors, productive sectors and economic analysts also encouraged parliamentarians and PT leaders, such as deputies Gleisi Hoffmann (PR) and Lindbergh Farias (RJ ), criticize the minister and pressure Lula to invest in a populist economic agenda that opposes the financial market.

Haddad’s inflection to the left, after being praised by the Centrão and financial agents in carrying out agreements to approve the tax reform and the fiscal framework, began when he classified the power of the Chamber as excessive, in a controversial interview given on 14 August. In the final approval of the new fiscal framework by parliamentarians, in its second passage through the Chamber, the amendment proposed by the government to guarantee an extra expenditure of up to R$ 40 billion in 2024 ended up being excluded. Haddad’s criticism and warned that the time was coming for the economic team to start considering spending cuts, something that seems taboo in PT administrations. In this vein, the deputy has gained support to carry forward the debate and vote on an administrative reform, another topic severely avoided by the PT administration.

2024 budget evidenced a gigantic fiscal challenge

The break in expectations of fiscal balance between the government and the market crystallized on Wednesday (30), when the Minister of Planning, Simone Tebet, presented a Budget proposal for 2024 that brings an increase in expenses of R$ 129 billion in relation to to 2023. To meet the goal of zero primary deficit, the government hopes for an increase of R$ 168 billion in collection, including revenues to be obtained through bills and other measures not yet approved by Congress.

On the same day, the market had already been affected by the disclosure of the second biggest gap in the historical series of federal accounts, which began in 1997. In July, the government collected R$ 35.93 billion less than what it spent in the month. The result was only better than that achieved in July 2020, the height of the Covid-19 pandemic, when a deficit of BRL 109.6 billion was recorded.

Senator Rogério Marinho (PL-RN), leader of the opposition in the Senate, took advantage of the disclosure of these worrying numbers to issue a warning to the government, while the recent improvement in the ratings of risk agencies for the Brazilian debt is still celebrated. He stressed that the good mood of the international classifiers can change quickly and radically depending on the direction that the economic policy points.

“It is good to remember that Brazil lost its credit ratings in 2015, during the Dilma government, due to an evident lack of control of the fiscal situation, driven by interference in prices administered by the government and by direct investments in thousands of works that ended up stopped with the collapse of public accounts”, he said.

The mayor, Arthur Lira, also thinks it’s important not to abandon fiscal rigor, especially when the market begins to distrust the government’s goals. “With regard to the target for next year (zero deficit), it is important that the government maintains a high bar. It is important that we all have this as a goal to achieve”, he declared during an event with businessmen this Friday (1st) in São Paulo.

To make matters worse for Haddad, who acknowledged “having difficulties” in meeting his fiscal goals, he once again promised to bring in resources to keep the accounts balanced, but the biggest challenge remains the approval of measures that increase revenue, in addition to preventing that Congress further increase expenses and exemptions, such as the extension of payroll incentives for 17 sectors. The text also received an amendment reducing the social security rate for several municipalities according to the per capita GDP of each one – which should make the federal government collect at least R$ 11 billion less per year.

Experts predict oscillations driven by political clashes

Bank analysts recorded in their reports to clients that the political noise surrounding the government once again dominated analysis and frightened markets. Proof of this is that the expected imbalance in public accounts has put pressure on the stock exchange and the exchange rate in recent days. Amid the fiscal hardships, disenchantment with Haddad already contaminates indicators, such as future interest rates. Finally, a prospect of a worsening international scenario, driven by the Chinese slowdown, may also put pressure on basic interest rates, which started last month on a downward trend.

For Eduardo Galvão, director of Public Affairs at the international consultancy BCW, Haddad and the government “are making a risky bet”, trying to reconcile the promise of balanced public accounts with real and immediate gains in the economy. “In the political calculation, the best moment for unpopular measures is precisely the beginning of the term, but it is also necessary to keep an eye on the popularity and support of Congress”, he pondered. In this sense, he conditions the maintenance of governability and the success of the PT project to re-elect Lula in 2026 to the continuity of positive general economic indicators, such as inflation, unemployment and GDP growth.

The expert believes that the Minister of Finance is relying on a set of still favorable indicators, such as falling unemployment and underutilization of labor at the lowest level since 2016, in addition to high consumer confidence, at the highest level since 2014, and interest rates on a downward trajectory, with no forecast of increases in inflation. “The country risk is falling and there has also been an improvement in the confidence of businessmen in services, commerce, industry and civil construction”, he noted.

But the biggest challenges for Haddad and the government will remain, in Galvão’s assessment, concentrated on the fiscal agenda, which has been marked by victories and defeats over the months. “Some measures of increased spending have not yet been offset by a recomposition of revenue, but they have not yet triggered any movement of pessimism either,” he said. He agrees that the doubt surrounding the zero deficit in 2024 will continue to stand out, being a fact that Haddad will have to face and overcome.

Political scientist Fernanda Arraes considers the increase in concern among investors understandable, who naturally prioritize finding more stability as the main element for their investment decisions. “Stability, in turn, depends on more solid scenarios, although they are often subject to fluctuations driven by specific events,” she said. In the context of the tensions between Haddad and Lira, she points out that the negotiations between the Ministry of Finance and Congress are characterized by ups and downs, especially with regard to tax reform and, more recently, the fiscal framework and its implications still in progress. discussion phase. “In the same way that such confrontations are inherent to the legislative process, so are the oscillating reactions of investors”, she points out.