S&P: Economists assess better outlook for Brazil – 06/15/2023 – Market

“End of trip to the ordeal of bad payers”, “lagged reaction” and “goals by the economic team”. For analysts consulted by Sheetthe revision to “positive” of the outlook for Brazil by the risk rating agency S&P Global Rating on Wednesday (14) should be seen as a good sign.

They consider, however, that the Central Bank should signal the beginning of a reduction in interest rates to maintain good growth projections and that the government still needs to deliver concrete fiscal results, if the country wants to continue on the trajectory of recovering the investment grade.

The revision of the perspective of Brazil’s note was celebrated by the Minister of Finance, Fernando Haddad, who attributed the result to measures taken by the portfolio and by the other Powers —adding that “the Central Bank needed” to contribute to the drop in basic interest rates (today in 13.75%).

Signs of greater growth and stability in the conduct of fiscal and monetary policy are factors pointed out by S&P. Treasury Secretary Rogério Ceron said the country could regain investment grade in 2026.

For Luiz Carlos Mendonça de Barros, the most important issue of the review made by the risk agency is that it marks a significant change for the classification of Brazilian bonds.

“It marks the end of a trip to the ‘calvary of bad payers’, which began with the deep crisis generated by economic policy mistakes committed in President Lula’s second term. [2007-2010].”

Mendonça de Barros, who was also president of the BNDES and Minister of Communications, assesses that the climate in relation to the performance of the economy has changed positively, but with weights.

“It has changed, in terms of government credibility, but not in terms of growth, as shown today. [quinta, 15]in a very clear way, the growth of the service sector announced by the IBGE.”

According to the manager of the PMS (Monthly Survey of Services), from the IBGE, Rodrigo Lobo, the services provided to families have reached an apparent ceiling and are not advancing.

UnB (University of Brasilia) professor José Luis Oreiro considers that agencies react lagged compared to the market. When considering the risk premium, which has fallen in recent months, there is no reason to be suspicious of the country’s ability to pay its external commitments, he says.

“During the transition to Lula’s government, liberal economists said that Brazil was going to enter a black hole and that did not happen. What proves it is that the diagnosis made by them, who have controlled economic policy since the impeachment of [ex-presidente] Dilma Rousseff, comes from a wrong theory.”

He also assesses that Brazil’s return to investment grade may not be as relevant as it may seem at first, as the exchange rate may appreciate and bring a surplus of speculative capital to the country.

“To maintain an optimistic climate, it is necessary that the Central Bank at least signal that it will start the interest rate reduction cycle and that there is no drastic change in the international economy. This can begin to generate a climate of comfort and increased popularity that will unlock actions in Congress and reduce the centrão’s bargaining power.”

The chief economist at Warren Rena, Felipe Salto, assesses that the news is positive and confirms the view that the fiscal side would be well taken care of by Haddad.

“The framework is not the ‘last cracker in the package’, but it was born on good grounds, with a spending rule and a commitment to a primary surplus in the medium term. This is good and the S&P is recognizing it.”

Salto considers that Brazil’s return to investment grade depends on the recovery of the economy, the resumption of trade agreements, inflation control and the reduction of real interest rates —which could stimulate investments— create a favorable environment for a positive cycle.

“Fiscal management is the big challenge. After approving the fiscal framework, it doesn’t hurt to remember, it will have to be observed, and spending will need to be controlled. There is no magic. The challenge, deep down, is to have a balanced economic policy.”

Salto, who was once Secretary of Finance for the State of São Paulo and executive director of the IFI (Independent Fiscal Institution) of the Senate, adds that the wind turn in the economy, for a more optimistic perspective, is grounded.

“There are reasons for optimism, because the economy is on a good trajectory. With the fiscal balance, interest rates will decrease significantly, motivating investment. It will be up to the State to reorganize public spending. The Treasury, undoubtedly, stands out at this moment as an area who is managing to score goals. The market sees that and the rest of the world does too.”

Chief Economist at MB Associados, Sergio Vale also sees the risk agency’s change in bias as positive, which he classifies as the result of a “minimally balanced” trajectory in recent months, after a “tortuous” start.

“There was an understanding of the importance of the fiscal issue, despite the fact that it is far from being resolved. There is an idea that Haddad managed to get rid of the bad sign he gave at the beginning of the year”, he says.

Vale does not see risks in the issue of the inflation target or any obstacle to tax reform. “This does not mean that everything is right. The government still needs to deliver concrete fiscal results in the coming years and we need to monitor how the Central Bank will be after the changes that will be made.”

He also says he believes that the country’s return to investment grade should only happen in another government, which makes adjustments that President Lula tends to avoid.

“The Treasury’s idea of ​​attacking the issue of credit guarantees is a good way of microeconomic reform, it is still a government under construction and it is not possible to compare it with the period [do ex-ministro da Fazenda Antonio] Palocci. You’re going to have to give a lot more to get closer to that moment.”