In Brazil, we are used to living, in an election year, with a nervous market, unstable amid the highs of the dollar.
This year, however, the market is a little different – more stable, less nervous. What factors, after all, would be contributing to this relative stability? First, investors are more concerned with the external environment than with the internal one. In the United States, for example, interest rates are expected to rise. In Europe, due to the war between Russia and Ukraine, there is great attention to the energy issue. Prices there soar and interest rates should also rise. China is expected to show its lowest growth in years.
In relative terms, Brazil is doing much better than other emerging countries, since it is one of the few in which there was an increase in the growth projection. It was also where the biggest revision took place. At the beginning of the year, the growth projection was 0.5%. The average, however, is around 2.4%. And there are those who project rates above 3%. Other than that, the growth data continues to surprise. The Central Bank’s Economic Activity Index, considered a preview of GDP, rose 1.17% in July. This number is higher than expected (1% was the ceiling of projections). Another point is that we have already seen the peak of inflation, which was around 12%. Now, the expectation for the end of the year is around 6%.
It is worth mentioning that the short-term fiscal in the country improved after the pandemic, contrary to what happened in other countries. In October 2020, the general government gross debt/GDP ratio reached 89%, a record value for the Central Bank’s historical series. By July, it had dropped to 78.3%, a level very close to that seen before the pandemic. But questions remain about the long term. It is important to add that the cost of betting against the Brazilian currency is high, since the dollar remains at a high level and interest rates are high. Another relevant factor is that the two main candidates for the Presidency of the Republic with a chance of winning are already known in the market, unlike other Latin American nations, where little-known candidates ended up winning.
The assessment is that President Jair Bolsonaro increased public spending on account of the elections. But the bet is that, later, if he wins the elections, he will do his homework again, moving forward with privatizations, approval of reforms and essential regulatory frameworks. The fact that ex-governor Geraldo Alckmin is Lula’s (PT) deputy was a sign that the ex-president will tend to have a more pragmatic and less revanchist behavior, if he goes up the Plateau ramp once again.
*Senior Analyst and Partner at ArkoAdvice
