Panic in the markets due to the fiscal juggling of the Bolsonaro government

Financial markets brazilians closed a week of panic over the juggling of the Government of Jair Bolsonaro to break the spending ceiling, which has led to a rout of senior officials in the Ministry of Economy.

The Sao Paulo stock market, which on Thursday already lost 2.75%, closed with a weekly fall of 7.3% and a decrease of 1.34% this Friday, with a slight rebound after it collapsed during the session 4.5%, in the middle of the growing uncertainty about the fiscal direction of the largest economy in Latin America.

The turmoil has also been felt in the foreign exchange market, where the US dollar reached 5.75 reais this week, its highest level in several months, although this Friday it recovered positions and ended at 5.62 reais in the commercial exchange rate.

In an attempt to appease the bad mood of the markets, President Bolsonaro assured that his government remains firm with its commitment to fiscal responsibility and that it will not embark on “adventures” that put the country’s economy at risk, hit by a soaring unemployment and double-digit inflation.

More social spending in election year

The origin of this crisis of confidence lies in the Bolsonaro government’s plans to finance the expansion of a social assistance program that it intends to promote temporarily during 2022, the year in which it will attempt to be reelected.

With no margin in budgets, a Gross Domestic Product (GDP) hit hard by the coronavirus and a recovery increasingly in question, the Minister of Economy, Paulo Guedes, and his team agreed to modify the rules of the spending ceiling to, in practice, increase it.

Guedes guaranteed this Friday that the measure is “weighted” and does not violate the current tax regime.

The spending ceiling, which limits the increase in public spending to the inflation of the previous year, has been in force in Brazil since 2017 and was promoted by the Government of Michel Temer, which adopted a liberal agenda in the little more than two years that was in power.

Bolsonaro, a retired Army captain who in his three decades as a congressman was never a fervent liberal, followed the same path of his predecessor and managed to earn the credit of the markets by choosing Guedes, an economist from the Chicago School, to lead the course of the weakened Brazilian economy.

However, as the 2022 electoral campaign approaches and his popularity plummets in the heat of the health and economic crisis, the president has distanced himself from the postulates of fiscal responsibility by proposing a strong increase in social spending in 2022 .

In this framework, the Government announced on Wednesday its plans to increase by 2% on average the value of aid to the poorest to a minimum of 400 reais (about US $ 70), as well as the number of beneficiaries, from 14.7 million families today to 17 million.

Waterfall of resignations

In the midst of all the controversy over the spending ceiling, on Thursday the special secretary of the Treasury and Budget, Bruno Funchal, presented their resignation, for “personal reasons”; the secretary of the National Treasury, Jeferson Bittencourt, and the two deputy secretaries of both.

In parallel, the Chamber of Deputies took the first step to endorse the Government’s fiscal engineering by approving in a commission to modify the expenditure ceiling and, in addition, postpone the payment of a part of the State’s judicial debts, which translates into more resources for 2022.

“The macroeconomic impact is enormous because the market interprets that the Government does not have the capacity to control its public accounts,” explained Juliana Damasceno, a researcher in the area of ​​Applied Economics at the Getulio Vargas Foundation.

The Secretary of Oil, Gas and Biofuels of the Ministry of Mines and Energy, José Mauro Coelho, also resigned yesterday, hours after Bolsonaro announced his intention to create another subsidy to help 750,000 truckers, affected by the rise in fuel.

In Damasceno’s opinion, expanding social assistance in this way, only during 2022, “serves an electoral interest”, since otherwise the Government would have created a “long-term program”, something, on the other hand, necessary afterwards. of the enormous ravages of COVID-19.