Santander worsens economic scenario for Brazil, sees Selic at 11.5% in 2022

RIO DE JANEIRO, BRAZIL – Santander Brasil’s macroeconomic team has revised projections for the Brazilian economy and now expects Gross Domestic Product (GDP) to expand 1% in 2022, from 1.5% growth previously expected, while Selic benchmark interest rate should end next year at 11.5%, from a previous estimate of 9%.

Ana Paula Vescovi and her team highlighted vital signs of changes in fiscal policy, especially in the legal framework of the spending cap, which has been the main fiscal anchor in recent years and drew attention to the high degree of uncertainty about the direction of economic policy.

For 2021, Santander maintained its projection of a 4.9% increase in GDP, but for 2023 it cut its growth forecast from 0.8% to stability. In the case of Selic, it changed the expected rate for the end of this year from 8.25% to 9.25% and from 7% to 9% by the end of 2023.

In relation to the IPCA inflation index, the bank now calculates increases of 9.6%, 5.2%, and 3.5% in 2021, 2022, and 2023, against previous forecasts of 9%, 4.7%, and 3.3%. The exchange rate forecasts the dollar at 5.50 reais this year (from an earlier estimate of 5.35 reais), rising to 5.70 reais next year (from 5.55 reais). For 2023, it is maintained at 5.20 reis.

The PEC of Precatórios [constitutional amendment authorizing postponing payment of court ordered federal debt], approved in the first round in the House of Representatives this week, “clearly surprised the markets (us included), both in terms of the number of additional expenses proposed, but also in terms of the ‘legal vehicle’ used to loosen the budget constraint in 2022.”

The bank’s team pondered that the changes still need to be approved in the Senate. The discussion has already impacted market conditions – with a substantial increase in volatility in Brazilian asset prices – and resulted in less optimistic economic expectations.