Framework reduces uncertainty, says Vescovi, from Santander – 06/17/2023 – Market

Approved in the Chamber of Deputies and about to receive approval from the Senate, the new fiscal framework reduces uncertainties regarding the future of public accounts in Brazil, although it is difficult to obtain a perfect rule, assesses the chief economist of Santander Brasil, Ana Paula Vescovi , in an interview with Sheet.

According to her, the new framework alone will not be enough to stabilize the public debt. Therefore, the government will need to maintain the engagement of Congress and the Judiciary in reaching measures that contribute to rebalancing the country’s finances.

Vescovi commanded the National Treasury between May 2016 and April 2018, when he took over as executive secretary of the Ministry of Finance until the end of that year. Based on this experience, she claims that the current scenario of collaboration between the Powers is positive, but warns that “pressures from interest groups exist”.

“This support cannot wane. It has to be permanent, until the fiscal adjustment is achieved in Brazil”, says she, who is also a columnist for Sheet.

Santander has revised its growth projection this year from 1% to 1.9%. Why? There were basically two reasons. First, this supercrop. We will have a GDP [Produto Interno Bruto] agro, in our projection, growing 12% this year. It weighs little in total GDP, but it will help to mitigate this contractionary cyclical phase. And it helps to deflate. We are betting that there may be food deflation this year. This is super important, because it is a gain in purchasing power for people with lower incomes.

The other factor is the resilient job market. We have real salaries in 12 months growing, discounting inflation, close to 8%. This helps support consumption. The aggregate mass of wages, which includes not only private sector wages, but also pensions, retirement benefits, income transfers from social programs, should grow 4% this year. This will also help sustain the GDP.

There is an expectation of a slowdown in inflation in the short term, but your report cites uncertainty for the medium and long term. The Central Bank itself cites the discouragement of expectations to keep the interest rate at the current level. What motivates this uncertainty? We have already accomplished an important part of the disinflation process, maybe even something to come, especially in the area of ​​food. But there is another part more associated with services that is still quite resilient, given that the job market is sustaining itself. Services disinflation is slower. This is the point that BC has emphasized. We are now at the most difficult stage, and we must wait for the results of a policy that is having an effect.

The government has criticized the level of interest, asking for a nod from the BC with the Selic cut. Many analysts expect this to happen from August onwards. Is it time to start this cycle of reduction? BC’s communication is very clear. If it will be in August or September, it will depend a little on the data ahead. But we do agree with the opinion that as of August and, perhaps with the current data, in September, the Central Bank will be able to start this cycle of monetary policy easing.

I know that a monetary contraction phase is difficult for everyone, but we are confident that the policy is working. Patience is all it takes to see that we are actually fighting the enemy, which is inflation. There is no other remedy to combat inflation other than to contain demand.

There is room for government tweak the inflation target? I don’t see and I don’t believe they’re going to move. It’s so counterproductive that I’m sure this discussion is being held or will be held technically. If you have a decision different from that, there will be worse asset prices.

I have no doubt that Brazil cannot tolerate any higher level of inflation. Our enemy is inflation, not interest rates. Interest is a result of a process of shocks that came and that we are adjusting. Brazil has a great opportunity to take the lead in the monetary easing process by having controlled inflation before other economies.

Having an inflation of 3%, the same as other emerging countries, means a long-term commitment to improve the situation of income inequality. And I even think you should keep the reference horizon [de ano-calendário], which is working. We widen already with this cycle, holding higher for longer, accepting a longer convergence. But ok, there may be some change, it would be good for us to say “the inflation target is 3% and that’s it”.

How does the approval of the new fiscal framework help or not the economic scenario? It already helped. Markets have improved substantially in recent weeks, and part of that improvement comes from the realization that we have a now-known rule of thumb to drive fiscal policy. There will not be a vacuum. There is an effort to control expenses, a communication from the government that is really concerned with containing and reviewing expenses.

From the approval in the Chamber, to the first manifestations of the Ministry of Economy with the Ministry of Planning, there has already been a very positive reaction. This helps to raise expectations, to converge towards inflation targets. And it helps BC’s work.

Mrs. was on the team that proposed and implemented the spending ceiling. In light of this experience, what are the strengths and weaknesses of the new framework under analysis by Congress? The positive point is that he has an effort to control expenses. There is the spending band, which aims to observe how revenue is performing to define the space to spend in the subsequent year. It is concerned with creating flexibility so as not to incur one of the main problems of the ceiling rule, which was easy to understand, but had a certain inflexibility.

Perfect rule is hard to have. The ceiling rule was very simple, and because it was simple it helped to coordinate expectations in fiscal policy. This rule is a little more complex, and we are having difficulty doing the math and getting the government’s numbers. But it did reduce uncertainty, even if it has some changes in the Senate.

There’s a challenge there. The rule alone will not be able to stabilize the public debt, which will continue to grow for some years. Parallel to the rule, the government announced the fiscal targets, which are very bold. So bold that it already has a divergence: the government announced 0.5% [do PIB] of deficit this year, the Treasury itself claims that it has -1% as a more credible target. So I think these are the points: more flexible, more adaptable, but less able to anchor expectations in terms of fiscal results.

Is there at least a balance, or is there something missing for it to be truly believable? The execution risks are great, you will have to monitor them over time. I followed the fiscal adjustment right after the Real Plan. There were no rules, there was no Fiscal Responsibility Law. I wanted to make the adjustment. I refer back to this period to say that, above all, it is an engagement of society. The understanding of Congress, of the Judiciary, of the importance of Brazil having public accounts in order and, above all, an organized government, managing to deliver.

How do you evaluate this engagement today? Minister Fernando Haddad has thanked both Congress and the Judiciary for adopting the measures, but Mrs. he has already been in government and knows barriers that are often placed. The government is getting space to talk about the importance of fiscal adjustment. It is receiving support from the Legislature, from the Judiciary. The coordination that comes from the economic team has been a positive factor in attracting support.

You need to persist in this effort, because during the execution we will realize that it is not so easy. Pressures from interest groups exist, and they feel that their demand is more important than everything else, while the demand on public policy is almost endless. That’s why there is a rule, because the blanket is really short. You have to choose priorities.

This support cannot fade. It has to be permanent, until you can make the fiscal adjustment in Brazil. We need to go back to having a primary surplus, stabilize the public debt and bring it down to a lower, safer and more sustainable level.

Should the rule be tightened, if not now, at some point in the future? It is hard to talk. Society makes choices, but it is important to make leaders understand the choices. If we made a stronger fiscal adjustment, we would reap the benefits of lower interest rates and more stable growth more quickly.

We recently saw the launch of a program to encourage the purchase of cars and the BNDES claiming a greater participation in the granting of credit. Do these measures generate distrust? We have to pay great attention to the mistakes of the past, to the fact that sometimes it anticipates demand and generates problems later in normalizing that demand. It distorts allocation decisions, penalizes governments in an attempt to mitigate some cyclical elements. Brazil is full of experiences that you shouldn’t forget.

A S&P Improved Brazil Credit Rating Outlook. Is it a vote of confidence? It’s a vote of confidence, yes. The most important thing now is to observe the execution of fiscal policy. And wait, because it’s a signal. The upgrade decision [melhora da nota] it hasn’t come yet, but my bet is that, if we approve a legal tax reform, we’ll get this upgrade.

Mrs. are you confident that this time it will be approved? I am confident. I think it will not be the ideal reform, but it will be the possible reform. It is transformative because it will remove an absurd amount of litigation and legal uncertainties. And it will open up the possibility of making other reforms that will be equally important, within the tax area, including granting subsidies, benefits that are not being properly evaluated. We are in a unique moment. I hope we don’t waste it.

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Ana Paula Vescovi, 54

Chief Economist at Santander Brasil. During the Temer government, she was secretary of the National Treasury and executive secretary of the Ministry of Finance. She was also chairman of the boards of directors of Caixa and Instituto de Resseguros do Brasil, as well as secretary of Fazenda do Espírito Santo.