By Étore Sanchez – Valor
RIO DE JANEIRO, Brazil – (Opinion) With the anticipation of household, business and government consumption, there is no hope for a bright outlook for Brazil in the foreseeable future.
Currently, Brazil is heading toward the nightmare of many economists: high inflation with low growth (or recession). This is not exactly a process of economic stagnation, but rather a global shock that affects this country more than its peers.
This time, the crisis can not be addressed as a reverberation of an external shock, given that its source is still strong and growing within the country, the coronavirus. But after the pandemic, are the prospects for Brazil positive?
Unfortunately, we are headed towards a ‘no’! First of all, before delving into the rationale behind the statement, I point out that the post-pandemic period will begin, according to our premise, from the moment a significant part of the population is immunized, without the need to eradicate the disease.
Economists often have a problem of time myopia, that is, after a certain time horizon everything “becomes a single thing,” and it is not that easy to predict a future that goes beyond something like 5 years. In other words, as far as I can see with relative accuracy, the prospects for Brazil are not positive.
Renowned American investor Ray Dalio, in the book “Principles: Life and Work,” very accurately explains one of the bases used to come up with the exclamation above. The concept I use from Dalio is very simple: spending through credit is an anticipation of revenue, whether it be from companies, individuals or the State.
What this means is that taking credit in the present, particularly when consumption factors will not increase productivity, is to forgo income in the future, since the debt incurred in the past will have to be paid off at some point.
Brazil, due to the pandemic, promoted two consumption anticipations: one through debt issuance to sustain a fiscal package, to which the excess is debatable, and the other through the expansion of classic credit, for companies and individuals.
Thus, the total credit balance (individuals and companies) as a proportion of GDP rose from 46% to almost 54%, reversing a downward trend and exceeding the peak on record, observed in December 2015. As a result, household indebtedness skyrocketed from 48.9% to 56.4% over 2020.
The data above represent significant anticipation of consumption by families who, in the near future, will have to give up present consumption to pay off debts incurred. Similarly, we have seen the gross debt as a proportion of the GDP jump from something around 75% in early 2020 to almost 90% in January 2021.
Clearly, the purpose of this text is not to consider the possibility of failing to support the poor in the worst health crisis in history, but only to construct the scenario that will lead us to the aforementioned perspective.
Thus, the extended available wage bill (ASWM) as a percentage of GDP, which managed to be sustained/increased in the first half of 2020, went into sharp decline very close to the moment when the fiscal balance stopped progressing.
It is worth pointing out that the MSAD was sustained despite the increase in unemployment, discouragement and the under-utilization of the labor force, whose prospects also hinge on the return of business confidence.
This decline becomes worse when we bring to the table the credit balance and household debt, since Dalio’s teachings suggest that these debts will have to be paid off in the near future, as I mentioned above.
Thus, with all this anticipation of consumption experienced by families, companies and the State, one is unable to have a booming prospect of Brazil on the “foreseeable” horizon, which can be dubbed as a “growth bottleneck”, since Brazilian activity will have to squeeze itself over the years to pay off past debts.
Another way to finance these debts, mainly those of the State, would be inflation, a method widely used in the 1980s. However, since the Central Bank has an inflation target, the process would only hasten the recession in the country. As inflation rises, the authority will raise interest rates and kill off activity more quickly.
But is Brazil doomed to failure? Fortunately, no!
Brazil could have several solutions to solve the prospect of bottlenecks to growth. Some are heterodox, which are innocuous in the long run, and the orthodox, such as reforms, for example. It is pointed out that projects that do not hurt the flesh, do not improve efficiency, and that do not reshape the public machine are not necessary, leaving the country always on the verge of reform.
This is an economic mantra, given the Brazilian perspective. Cabinet changes, connections, negotiations and political agreements will only be interesting if they are intended to place Brazil under a reform perspective.
These, in addition to making room in the budget for the country to have a perspective of high solvency and support for the needy population, would restore confidence that the nation has prospects, fostering local and foreign investments in the country.
Such an injection of (private) capital, which also goes through privatizations, would generate jobs and promote an advance in MSAD, making it easier to settle individual and corporate debts. This would make room for more consumption and credit contracts. Depending on the state’s situation, this will be – or not – the conduct until the next crisis.
Source: Valor