Haddad is under pressure from government allies for fear of a worsening economy – 02/26/2023 – Market

Fear of the possible deterioration of economic conditions has fueled pressure on Fernando Haddad among members of the government and allies of President Luiz Inácio Lula da Silva (PT).

The internal offensive against the finance minister comes amidst the government’s public tussle over fuel taxation, the central theme of the meeting this Monday (27th) between Lula, Haddad, Rui Costa (Casa Civil) and the president of the Petrobras, Jean Paul Prates.

The meeting scheduled for 10 am, at the Planalto Palace, takes place on the eve of the expiration date of the MP (provisional measure) that extended the tax relief on gasoline and ethanol for 60 days, until February 28 of this year. The measure signed by Lula on January 1 provides for the return of PIS/Cofins rates next Wednesday (1st).

The theme opposes the political wing and the economic team of the Lula government. Maintaining zero rates is defended by PT members and political allies with an eye on the impact on consumers’ pockets. There is fear that the measure will boost inflation again, which has accumulated a high of 5.77% in the 12 months through January.

Currently, gasoline is sold in the country at an average price of R$ 5.07 per liter. If federal taxes are passed on in full, the average liter price will be increased by R$0.68 and will rise to R$5.75, the level last seen in July 2021.

Ethanol would jump from R$3.80 to R$4.04, with an increase of R$0.24 per liter. The final numbers, however, will depend on the companies’ transfer strategies.

The rates were zeroed by Jair Bolsonaro (PL) in 2022, in an attempt to contain the rise in prices at pumps amid the advance of oil prices in an election year.

But tax relief means loss of revenue for the Union. Thus, the economic team defends the return of taxation on fuels in an attempt to mitigate the BRL 231.55 billion shortfall in public accounts and to restore government coffers.

According to calculations released by Haddad in an announcement of the tax package, the end of the exemption on gasoline and ethanol would represent an increase in revenue of R$ 28.9 billion this year.

In a social network, the president of the PT, Gleisi Hoffmann (PR), defended last Friday (24) that a new price policy be defined for Petrobras before the discussion on the resumption of federal taxes on fuels.

“We are not against taxing fuel, but doing so now is penalizing the consumer, generating more inflation and failing to fulfill a campaign commitment,” he wrote.

In addition to fuel prices, pressure from members of the government and Lula’s allies on Haddad includes other points on the economic agenda that, in their view, could contribute, if poorly managed, to a worsening scenario and the worsening of political problems. .

Among members of this group there is always the assessment that a government that won the elections by a minimal margin does not have many credits to burn and is at risk of regrouping and strengthening radical Bolsonarism.

A particular concern has been the credit scenario in the country. According to these people, the fight against default should be seen as an immediate challenge by the Minister of Finance, who should establish urgency to face the problem.

Although they disagree with the magnitude of the problems in this area, allies agree with the existence of threats to the economy.

In the opinion of one of the president’s interlocutors, for example, there is a credit crisis underway as a result of low growth and the reduction in company revenues. The strong contraction of credit associated with the default of companies and families, he says, could culminate in a recession.

For another collaborator of Lula, it would be a certain exaggeration to talk about a credit crisis in view of the soundness of the banking system. The problem, however, would be the credit risk for small and medium-sized companies, with cases of insolvency being located among large companies, such as the Americanas.

To help the approximately 70 million Brazilians negative for default, the president’s allies call for the rapid implementation of Desenrola, a debt refinancing program, whose final design was promised for January.

The PT president herself, Gleisi Hoffmann, pointed out, in an interview with Sheetthe program as one of the government’s priorities for economic recovery.

For micro, small and medium-sized companies, one of the proposals is for public banks to increase the guarantee funds, strengthening the credit system, in addition to strengthening Pronampe (national program to support micro and small companies).

President of BNDES (National Bank for Economic and Social Development), Aloizio Mercadante defends increased capacity for granting credit. For this, he has claimed a reduction in dividends paid to the Union. Mercadante pleads for equality with public banks, such as Banco do Brasil.

Today, BNDES pays up to 60% of profits to shareholders. BB, in turn, pays 40% to its shareholders, including the Union as the majority shareholder. Mercadante also suggests exemption from IOF (Financial Operations Tax) on financing, which would also represent tax waiver for the government.

One of Lula’s main struggles at the beginning of his term concerns precisely the government’s fear that a slow pace or a downturn in the economy will deprive him of political capital at the start.

The target of the petista was the president of the Central Bank, Roberto Campos Neto, taken to office by Bolsonaro and whose mandate ends on December 31, 2024.

Lula publicly defended an increase in the inflation target to pave the way for easing the monetary tightening —the Selic rate is now at 13.75% a year— and for economic growth.

The president went so far as to say that the current Selic level is a “shame”, called the BC’s autonomy “nonsense” and gave signs that he may review the institution’s independence after the end of Campos Neto’s term.

Although the BC indicates maintaining interest rates at this level for longer, the risks to economic activity, the increase in defaults and signs of greater financial difficulties faced by companies should challenge the Central Bank’s conviction about maintaining the current interest rate level .

For a group of economists, the latest evidence justifies a reassessment of the scenario by the Central Bank, in order to anticipate the interest rate cut with the aim of stabilizing activity, even with inflation still far from the target.

For others, however, the fiscal risk —translated into the expansion of expenses and the absence of concrete guidelines on the new spending framework— and the resilient inflation still speak louder and inspire caution, justifying the maintenance of monetary policy by the BC.