The Week Ahead in Brazil #80

What is happening in Brazil?

1. Politics – The final report of the parliamentary inquiry committee (CPI) on the pandemic was read by Senator Renan Calheiros (MDB-AL) on Wednesday (20). The report recommends 68 indictments, including President Jair Bolsonaro (no party). The vote to approve or reject the report, which can still be modified, is scheduled to occur on Tuesday (26). The result will be sent to the Attorney General’s Office (PGR). (Estadão)

The proposed amendment to the Constitution (PEC) that changed the composition of the National Council of the Public Ministry (CNMP) was rejected by the Plenary of the House of Representatives by 297 votes to 182 against. (Estadão)

The alternative text to the PEC of the Precatórios (PEC 23/21) was approved by the special committee on Thursday (21). The substitute delays the payment of court-ordered public debts (precatórios). It also changes the calculation of the ceiling of public spending. As it is a PEC, to be approved, it is necessary the favourable votes, in two rounds, of 3/5 of the House and Senate. The PEC is on the agenda of the Lower House and may be voted on Tuesday (26). (Agência Câmara de Notícias)

2. Economy – The Secretariat of Economic Policy (SPE) has prepared important reports this week. The first was a technical note, on Tuesday (19), in which it presents data related to the Gross Domestic Product (GDP) of Brazil in relation to other countries. The SPE states that Brazil had one of the lowest GDP drops in 2020 among Latin American countries and an accumulated real GDP compatible with other countries and economic blocks. The second was an informative note, released on Wednesday (20), in which it reaffirms the good conditions of the fiscal trajectory and the commitment to the spending cap.

The issue of increasing the social program is on top of the agena. Currently, the programme pays the average ticket of R$197. The ticket of the new social program would increase temporarily to R$ 400,00 until December 2022. The decision was criticised by economists and financial market analysts. The former president Lula said that the value should be higher, at R$600. (Estadão and Valor)

One way to expand the limit for expenses is through a proposal of amendment to the Constitution (PEC) postponing the payment of precatórios that was sent for consideration by the Plenary of the Lower House. Another is by changing the indexer of the ceiling of spending that, today, is corrected by the IPCA in 12 months until June of the previous year. The proposal is that the new indexer be calculated by the IPCA from January to December. If the changes are approved, it could create a budget space of R$83bn for 2022. The financial market reacted negatively to the so-called “fura teto”. (Folha, Estadão and Valor).

In a press conference, the Minister of Economy, Paulo Guedes, said that it is not possible to ignore the situation of vulnerability of the poorest families and that this extra expense does not represent a fiscal risk. He affirmed that the fundamentals are still solid and that this expense is temporary. Many economists say this movement will cause a rise in inflation (Valor)

Current account transactions registered a deficit of USD1.7bn in September 2021. The value was above market expectations. The trade balance continues in surplus.

The Central Bank’s Monetary Policy Committee (Copom) decides on changes to the Selic rate on Wednesday (27). The market foresees an increase of 1.25 or 1.5 percentage points. (Valor)

3. Public administration – Of the R$384.9mn available for actions to combat deforestation and fires, R$ 83.5 million had been used up to September by Ibama and ICMBio. The amount represents 22% of the total available.

On Thursday (21) at night, four members of the Ministry of Economy resigned, among them the special secretary of Treasury and Budget, Bruno Funchal. The decision occurred after the government’s announcement to establish the average value of R$ 400,00 for the Brazil Aid. There were rumors that the Minister of Economy, Paulo Guedes, would resign, but he reaffirmed, in a press conference with President Bolsonaro, that he remains in office. (Estadão)

On Wednesday (20), Brazil reached the mark of 50% of the population fully vaccinated against Covid-19.

How to read it?

1. The political trend remains neutral. Bolsonaro continues without causing institutional conflicts, the coalition remains stable, as well as popular support.

This week, the vote on the CPI report may cause political noise, raising the risk of conflicts. In Congress, the vote on the precatórios also deserves to be closely monitored as an indication of the political landscape.

2. Contrary to my own expectations, the trend for the economy remains positive. Although I am personally opposed to the flexibilization of the spending cap, I will explain my analysis as directly as possible. Before that, overall, trade outcomes remain positive and inflation continues to be fought by monetary policy. Now, let’s turn to fiscal policy, which was the main news of the week.

I think there are two important analytical categories to help us understand these events. One is fiscal of course. It’s what the R$400/month increase represents from a fiscal point of view. I would say that it is not very significant given the size of the Brazilian economy. The SPE reports bring this clearly. That is, from the fiscal point of view, this increase is far from being a serious problem in the fiscal trajectory of the government. Besides, as I said last week – and put elegantly by Minister Guedes -, the State needs to offer something for the social. If this is so, why has there been so much noise? The answer lies in the second analytical dimension, in the motivation behind this decision and the risk it represents.

The motivation may be electoral, given the tradition of Brazilian politics, but it may also be, at the same time, a need to give some relief to the needy population. I think there was an exaggeration in the emphasis on the first kind of motivation. As for the risk, naturally, the increase represents a change in a fiscal principle, which is the Executive and the Legislative wanting to spend much more than they should in order to win votes for their respective re-elections, which is a high risk. If this was done for the neediest, what will stop them from continuing to do this for other social and business sectors? This is the main problem.

The government needs to balance the will to spend more with the need to control inflation, and this is not going to be an easy task, even more so in the pre-election period. Structurally, however, the government has managed to make important improvements. It needs to decrease the gap between what it expresses as will and what it manages to deliver. Despite these problems, I continue to conclude that the Brazilian economy, under the circumstances, remains on a positive trend.

3. Public management remains in neutral mode. Covid-19 vaccination is on the rise in Brazil.

The changes in the team at the Ministry of Economy were not well taken, showing a sign of discreditability in the management of the Ministry. Technically, they failed to create a common understanding. Others with similar capacity will step up, but there’s a learning curve.

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