Brazil's New Fiscal Proposal Becomes Stricter in Congress
Comment of the Day

May 16 2023

Commentary by Eoin Treacy

Brazil's New Fiscal Proposal Becomes Stricter in Congress

This article from Bloomberg may be of interest to subscribers. Here is a section:  

Brazilian lawmakers introduced changes to President Luiz Inacio Lula da Silva’s proposed spending rules to include automatic penalties in case the administration is unable to meet fiscal goals set in the bill.

The government would be forced to reduce spending in case revenue comes in below its estimates, including delaying some payments, freezing the salary of public workers and halting the hiring of new ones, according to the text of the bill released on Tuesday by lawmaker Claudio Cajado, the bill’s rapporteur.

“Party leaders’ reaction to the new text is very positive,” Cajado told reporters, adding that the plan is to take the bill to a floor vote on May 24. “We made room for different opinions and I hope there will be no more changes to the bill.”

The new fiscal framework proposed by Finance Minister Fernando Haddad includes small but growing primary budget surpluses, which don’t take into account interest payments, in order to stabilize public debt. It’s part of government efforts to assuage investors worried about Brazil’s finances under Lula and to help the central bank lower interest rates, considered by the president as the main impediment to growth.

Eoin Treacy's view

Brazil was among the first to aggressively raise rates to ensure a positive real rate would counter inflationary pressures by sucking liquidity out of the economy.  Today that positive real rate stands at 9.57%.

The central bank has been adamant they are unwilling to reduce rates, despite CPI inflation returning to the pre-pandemic range, until the question of fiscal probity has been resolved. The fiscal framework is an attempt to placate the central bank and it may be enough.
Itau Unibanco has held a sawtooth profiled uptrend since 2020 and is currently rallying from the more recent higher reaction lows.
PagSeguro rallied to closed above its 200-day MA last week on speculation the next move by the central banks will be to lower rates and stimulate consumer credit demand.

Vale and Petrobras represent around 25% of the iBovespa Index so what happens in terms of Chinese demand for resources will play a significant part in the wider market’s recovery. 

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