The government has only just begun, which makes full inferences about what Lula 3 will be a fearful exercise. But so far it looks like it’s not going to be good in terms of the economy.
Fernando Haddad and Simone Tebet –strong names in the economic area– spoke and talked with very well-prepared technicians and always had a more balanced position on economic issues. Before assuming the ministry, Haddad sought out names of excellence in the academic world for assistants, but had difficulty recruiting them. In turn, Simone Tebet chose Elena Landau, an orthodox economist with extensive executive experience, as economic adviser during the election campaign. So, when the nominations were made – and even a little later – it didn’t look so bad.
But then began the irresponsible speeches by the President of the Republic and government leaders and the Treasury’s vacillations.
In fact, the problems started earlier, in the budget discussion at the end of 2022, with the class that is now in charge supporting an increase in spending for the coming years substantially higher than necessary to fulfill what was proposed during the campaign! And the campaign, by the way, had already been marked by populist rhetoric on both sides of the political spectrum, full of fiscally compromising promises. As we have mentioned here several times, at the base of every macroeconomic balance, of a stable inflation and of moderate interest rates, always and everywhere, was and is the “boring” fiscal responsibility. The incoming government fought, before taking over, to weaken it.
We’re not just talking about rhetoric to please militancy, like Lula’s countless speeches about the supposed horrors arising from the spending ceiling. This ceiling has already been weakened by the various PECs approved during the Bolsonaro administration, consequently losing its ability to signal some long-term fiscal balance. But the current administration has done little, in concrete terms, to put an alternative in place – we still have very vague indications of a new fiscal rule and tax reform. As a result, the scenario of controlled inflation and low interest rates is increasingly distant.
It does not stop there. In recent weeks, attacks on the Central Bank have reached worrying levels. Pressure not only to revise the inflation target upwards (although we are against it, we see room for this discussion, although certainly not at this moment), but a direct cry for the Central Bank to start cutting interest rates now. Just to put it in context, free price inflation ended 2022 close to 10%, and inflation expectations for 2023 are around 6%. With these numbers, the argument that monetary policy is crazy is virtually unavoidable, as Lula and several of his lieutenants have been insisting. The country’s president is attacking a state institution in his own country.
Recently, the Minister of Finance joined this foolish chorus. He has proposed a tax hike on exports that does little for the intertemporal budget constraint and has used the debatable measure to publicly pressure the monetary policy committee to forcefully cut rates. Where have we seen something similar happen? In Argentina and Turkey, countries with galloping inflation.
On another flank of attack, President Lula promises to use the BNDES to counterbalance the Central Bank’s high interest rate policy. This refers to the fearful use of the bank during the PT administrations (mainly Lula 2 and Dilma 1), characterized by an increase in the inefficiency of the economy, a decrease in competition, a worsening of distribution and a loss of power in monetary policy. One of the biggest institutional advances in the last six years has to do with the remodeling of the BNDES, which stopped using low-paid workers’ money to provide cheap credit to entrepreneurs.
Obviously, all these signs may just be to please part of the militancy and support base of the government. The problem is that we don’t know if it’s just that. If there is a reasonable probability that these promises are for real, the risk of the country not honoring its commitments increases. Financial assets begin to reflect such a scenario: longer interest rates (which are not so strongly influenced by Central Bank actions) rise and inflation expectations deteriorate. It is a shot in the foot of the government itself, which needs to transfer more resources to its creditors to compensate for this higher risk, in addition to further postponing the cut in interest rates by the Central Bank.
Judging by the first hundred days, it’s hard not to be pessimistic about the direction of the economy.
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