Eurasia: Lula gives ‘mixed signals’, but economy should be better than expected

The economic management of the next government of Luiz Inácio Lula da Silva (PT) should not be as negative as some financial market professionals predict. In the opinion of political scientist Christopher Garman, director for the Americas at political risk consultancy Eurasia, the next finance minister, Fernando Haddad, “will forward a better agenda than expected on the revenue side and also on the expenditure control part.” 

According to him, the forecast for Eurasia is that “economic policy turns out to be better than expected”.

“Of course, the economic team has a more PT profile and the market sees the risk of a more expansionist fiscal policy, of lack of control of public accounts. But caution is needed not to reach exaggerated conclusions”, said Garman in an interview with Bloomberg Línea.

For Garman, the ministry that Lula da Silva has presented so far is explained by two axes:

• The president-elect has been facing difficulties in finding credible names in the market, with some invitations turned down and;
• Lula da Silva wants “high confidence” people around him.

According to the political analyst, as the new government failed to attract names that would bring credibility to the team, “the expectations that a broad coalition would be assembled were frustrated.”

One of the names quoted is that of economist André Lara Resende, one of the fathers of the Real Plan, who initially refused to take over the Ministry of Planning.

This was also the case with businessman Josué Gomes da Silva, president of Fiesp (Federation of Industries of the State of São Paulo), chief executive of Coteminas and son of José Alencar, who was vice-president of Lula da Silva in his first two terms. He would have refused to assume the recreated Ministry of Development, Industry and Commerce, which ended with vice-president Geraldo Alckmin (read more below).

It was expected that the Ministry of Education and Social Development, for example, would have allies, especially Senator Simone Tebet (MDB), who, after being the third most voted candidate in the first round of the presidential election, to support Lula da Silva in the final stretch.

But so far this has not happened – although there are still 17 ministers to be announced. Education stayed with senator-elect Camilo Santana (PT-CE), and Social Development, with senator-elect Wellington Dias (PT-PI).

‘MIXED SIGNALS FROM LULA DA SILVA’

“It’s mixed signals,” Garman said. “By putting people he trusts in the ministry, Lula da Silva must see a difficult scenario ahead. But this evidently generates disquiet among the allies. It’s a fine balance between giving space to trusted people and not opening it up to allies,” he said.

“From the economic policy side, it is a worrying sign. The new finance minister assembled a team of experienced people, but without any credible big name in the market – although it is too early to conclude that the Waiver PEC [better known as the Transition PEC] is a sign that the economic policy will stay with a worrying debt trajectory,” said Garman.

On the strictly political side, according to the Eurasia director, “everything is more difficult”. “The government will pay a price for setting up a ministry that does not inspire confidence in running the economy. This translates into a higher yield curve, and the private sector is more restless.”

FUNDRAISING IS PRIORITY

As quoted by the political analyst, Haddad is showing signs that he intends to prioritize revenue over the economy. On Monday (19), he announced that Treasury Prosecutor Anelize Lenzi Ruas de Almeida will be the Prosecutor General of the National Treasury (PFGN). The PGFN is responsible for the legal representation of the Union. It is the body that collects tax debts in court and administrative bodies.

Almeida has been with the PGFN since 2006 and worked in the management of the Federal Active Debt, the department that monitors all federal tax debtors. Active Debt stands at R$2.7 trillion (US$510 billion), according to a fiscal risk report released in November by the Treasury Secretariat.

During Anelize Almeida’s tenure in managing the Active Debt, mechanisms for negotiating and encouraging the payment of taxes were created, such as the Differentiated Credit Collection Regulation (RDCC), a set of rules to rationalize the operation of the Treasury Attorney’s Office; the taxpayer compliance program, which rewards taxpayers who pay their taxes on time; and the debt rating, which classifies tax creditsaccording to the possibility of payment by the debtor.

The Treasury’s fiscal risk report pointed out that the stock of lawsuits against the Union has grown 39% since last year, with a discussion of R$2.9 trillion (US$550 billion). Of this total, RS$528 billion (US$99.91 million) are considered a “probable risk” of defeat for the Union, and the rest, a “possible” defeat.

At the press conference in which he announced the new PGFN, Haddad said that he wants to “structure a group to monitor fiscal risk in Brazil” to “compose a team that will act more firmly with the courts to reduce the fiscal risk of judicial decisions.”

“Few people give due importance to the need for a very fine performance by the PGFN in the defense of the National Treasury,” said Haddad. “The PGFN and the Federal Revenue will be two very important bodies for restructuring our fiscal agenda. Having clearer laws, combating tax evasion, recovery of tax credits, exemplary performance in the courts,” he added.

Haddad announced names he trusted for areas related to tax collection. The Revenue Secretary will be lawyer Robinson Barreirinhas, who worked with Haddad when he was Finance Secretary for the City of São Paulo, under the administration of Marta Suplicy (at the time in the PT, today in Solidariedade).

ALCKMIN: DIALOGUE WITH THE INDUSTRY

Another name that aroused attention in the economic management of the new Lula da Silva government was Vice President Geraldo Alckmin (PSB). On Thursday (22nd), the president-elect announced that his deputy will accumulate the post of Minister of Development, Industry and Foreign Trade (MDIC, which will be recreated).

There was some surprise, since both Lula da Silva and Alckmin had declared that the vice-president should not occupy ministries, but should be an ally of the president in managing the country. But the announcement came after businessmen from the industry declined the invitation to head the folder, like Josué Gomes da Silva.

A source close to Lula da Silva and close to PT leaders told Bloomberg Línea that Alckmin was a way to give Lula da Silva peace of mind in his relationship with the industry. It is a sector that supported Bolsonaro throughout his government and that is concentrated in São Paulo, a state that Alckmin governed for 13 years.

According to Christopher Garman, Eurasia “looks favorably” on the nomination. “Alckmin and Haddad have a good relationship and should do a good job in government”, analyzed the political scientist.

With information from Bloomberg Línea