Goldman Sachs: fiscal framework will worsen “visibly” in Brazil

On Monday, October 31, the US bank Goldman Sachs said Brazil’s fiscal framework will deteriorate “visibly” in 2023.

It said that Luiz Inácio Lula da Silva (Workers’ Party – PT, left), the candidate elected in the presidential elections, will have to face the challenge of having responsibility in public accounts to fulfill campaign promises.

According to the report, Lula da Silva will have to deal with the electoral Congress, which is one of the most autonomous and independent in the decade.

The center-right parties will have to impose political limits on the PT candidate.

Da Silva defeated Jair Bolsonaro (Liberal Party – PL, right), the first president to seek reelection and lose.

His lack of pronouncement is also something that makes the market watch out.

The international bank stated that the elections were the most polarized and “emotionally charged in many years”. The percentage was narrow, Goldman Sachs emphasized.

The bank’s report said that the PT party maintained its strength in the Northeast while the PSDB was in the runoff in four states but was ousted from São Paulo – the economically largest and most populous state.

Goldman Sachs also highlighted the victory of Tarcisio de Freitas (Republicans) in São Paulo and Eduardo Leite (PSDB) in Rio Grande do Sul.

“In all, there will be 11 different political parties governing the 27 states, and there was a high reelection rate among the 20 incumbent governors (18 were reelected),” it said.

Congress has become more center-right and conservative, according to the bank. Bolsonaro’s PL party will have 99 seats in the House and 13 in the Senate.

“President-elect Lula da Silva will be dealing with one of the most autonomous and independent legislatures in decades, and the centrist parties will likely set some political limits,” it said.

CONGRESS AND LULA DA SILVA

Goldman Sachs said the center-right dominated Congress should limit tax increases or very large expansion of permanent “unfunded” public spending. It weighed, however, that it should show a “limited appetite for major reforms.”

He said that the multi-party base of political support in Congress may be unstable or “unreliable.”

“President-elect da Silva will have to turn to center parties to form a governing coalition and even to some center-right parties to pass constitutional amendments. Left and center-left parties together will control only 27% of the seats in the House,” it said.

The bank also pointed out that da Silva will have to persuade center parties to participate in the government because the left will have about 120 seats in the Chamber – less than needed for a simple majority vote. There are 513 federal deputies.

“We expect President-elect Lula da Silva to get support from a significant portion of the MDB and PSD parties, segments of the PSDB/Cidadania, and probably even some of the parties that currently support President Bolsonaro’s reelection bid,” Goldman Sachs said.

The report said that the parties, in turn, should seek representatives in ministries and regulatory agencies and control budgetary resources.

PUBLIC ACCOUNTS

The bank said the fiscal picture should deteriorate “noticeably” in 2023 from a primary surplus forecast for 2022.

The federal government expects a balance of R$40 billion (US$7.7 billion) in public accounts this year, the first result in the blue since 2013.

“President-elect Lula da Silva will have to accommodate significant spending pressures due to, among other things, campaign promises to maintain and improve the flagship cash transfer program, grant real increases to the minimum wage, raise the threshold for starting to pay personal income tax (to R$5,000 from the current R$1,903), increase public sector wages, and increase public investment,” Goldman Sachs listed.

On fuels, the bank sees a measure to reverse the tax cuts adopted by the Jair Bolsonaro government as unlikely.

“It will be virtually impossible to accommodate ongoing spending pressures and other campaign promises within the limits of the spending cap.

“Thus, we expect President-elect da Silva to propose a constitutional amendment to suspend the spending cap and subsequently propose a new (probably more flexible) fiscal rule to anchor fiscal policy,” he said.

In the short term, Goldman Sachs expects PT’s strategy of public sector and state-owned investments as the main growth drivers.

The GDP (Gross Domestic Product) should have a greater expansion in this period, but inflation should remain high, and there will be a greater negative balance in the government’s accounts.

The country would suffer from increased fiscal risk and lower potential growth in the medium term.

According to the bank, the positive side is the macroeconomic scenario with credible inflation targets, a still modest current account deficit, and a considerable trade surplus with countries.

The international reserves are also voluminous, and there is low foreign debt.

REACTION FROM THE FINANCIAL MARKET

The Ibovespa, the main index of the B3 (São Paulo Stock Exchange), fell 2.12% this Monday morning (October 31, 2022).

At 10:25 AM, it was down 0.98%. The dollar rose to R$5.41 at the maximum of the day.

Investors operate with caution with the result of the runoff presidential elections.

Some analysts already expected Lula da Silva’s victory, but the election outcome still has an impact, even if to a lesser extent.

The financial market has concerns about da Silva’s government because there are still no details about what will be done in economic policy.

Da Silva has already signaled that he will split the Economy Ministry and return to the Planning and Finance Ministries.

Investors wanted an answer from Lula da Silva about who would be part of the economic team.

Some operators floated the possibility of former Central Bank President Henrique Meirelles heading da Silva’s economic policy.

Meirelles gave a live interview to Poder360 after the runoff.

He said that Lula da Silva might ask for a “waiver”, a license from Congress, to pay for part of the election promises that increase public spending.

He said it would be an exception in 2023 but that it would not be a measure to be adopted until the end of the government in 2026.

The market has concerns about the waiver because the country has a delicate fiscal situation, although it has improved in the last two years of government.

According to the National Treasury, the country’s public debt should end the year at 76.2% of GDP (Gross Domestic Product).

The percentage is above its international peers.

The main measure to increase spending is to maintain the Brazil Aid (or Family Grant) at an average value of R$600.

The 2023 Budget does not foresee the cost of a social benefit in this amount.

Poder360 has shown that Lula da Silva’s measures will cost R$181 billion in public accounts next year.

With information from Poder360