The tax is being created to have the same revenue as the old IPI
05/03/2024
Bernard Appy — Foto: Cristiano Mariz/Agência O Globo
The revenue from the Selective Tax (IS), which will be created with the consumption tax reform, will not exceed R$50 billion per year, according to estimates made by the Ministry of Finance. The tax is being designed to have the same collection as the current Tax on Industrialized Products (IPI), Bernard Appy, Brazil’s special secretary for tax reform, told Valor.
According to the secretary, the federal government collected around R$60 billion last year from the Tax on Industrialized Products. Under the new tax regime, the aim is to maintain the same revenue at most. He explained that around R$10 billion will be collected from the tax that will be levied on products that compete with those produced in the Manaus Free Trade Zone, a tax that was maintained by the reform to keep the region’s competitive edge. The rest (up to R$50 billion) will be collected from the Selective Tax.
Mr. Appy stressed that the Selective Tax will not be used by the federal government to collect more tax, which is a concern that has been raised by experts. “It’s not in [the federal government’s] interest to collect more with the Selective Tax than it does with the IPI. The Selective Tax has no tax collection objective. It is regulatory and will be used for regulatory purposes,” said the secretary. “The way it is today, it will raise less than R$50 billion,” he added.
He said that if the federal government wanted to collect more from the Selective Tax, it would have to share the revenue with states and municipalities, which would be a self-inflicted setback. “For us, it’s not in our interest for it [the Selective System] to raise more than R$50 billion because if it raises more than R$50 billion, we’d have to reduce the CBS [federal VAT] rate proportionally, and we’d have to send 60% of the revenue to the states and municipalities. In other words, for every real we collect from the Selective Tax over R$50 billion, we lose R$0.60 in net revenue for the federal government, so we’re not going to do that. We don’t usually shoot ourselves in the foot,” he explained.
The secretary also said that the decision to leave the definition of Selective Tax rates to ordinary law was so that his department would have more time to look into issues that are changing, such as taxation on alcoholic beverages, cigarettes, and polluting vehicles. The Selective Tax will apply to these three items, as well as to boats and aircraft, soft drinks, and mineral goods (iron, oil, and natural gas).
Mr. Appy thinks it is unlikely that the bill with the rates will be sent to Congress this year because it is not the priority now, and there is time to discuss it later since the tax will start to be levied as of 2027. “It is not something that requires a mega system to be implemented, so there would be time to do it.”
However, Mr. Appy said that if there is a political decision by the government or a desire by Congress, there would be no impediment to sending the bill this year.
The Selective Tax will be created to replace the Tax on Industrialized Products and will tax goods and services that are harmful to health or the environment. According to the supplementary bill, the tax will be levied only once, and credits may not be used for it.
Study projects that, if current conditions are maintained, there will be more beneficiaries than contributors as of 2051
05/03/2024
Leonardo Rolim — Foto: Edu Andrade/Ascom/ME
Brazil has fewer than two contributors for each Social Security beneficiary, a ratio expected to deteriorate in the coming decades. By 2051, there will be more insured individuals than those contributing to the pension system, according to a study published this week by the Institute for Applied Economic Research (IPEA).
The estimate considers all pension schemes—for public servants, military personnel, and private-sector workers—as well as the so-called BPC (Continuous Cash Benefit, a pension for poor elders and disabled people). Still, it does not consider other benefits such as maternity aid and the former sickness benefit, now called temporary incapacity aid.
The study shows that the ratio of contributors to beneficiaries fell to 1.97 in 2022, the most recent data available, from 2.26 in 2012. Projections indicate that this ratio would drop to 0.99 by 2051 and 0.86 by 2060, the last projected year. In other words, if conditions remain unchanged, there will be more beneficiaries than contributors to Social Security from 2051 onwards.
In absolute numbers, it is estimated that the total number of beneficiaries from retirement, survivor’s pensions, and BPC would grow from 31.4 million in 2022 to 61.2 million in 2051, and would reach 66.4 million by 2060, more than doubling over nearly four decades. Meanwhile, the projected number of Social Security contributors would decrease from 61.8 million (2022) to 60.6 million in 2051 and 57.2 million in 2060. That is, the total number of contributors is expected to decline over time, while the number of insured more than doubles.
Researchers Rogério Nagamine and Graziela Ansiliero, authors of the study, note that the worsening ratio of contributors to beneficiaries is due to the natural maturation of the pension systems and the rapid and intense aging of the population. Another factor contributing to the deterioration of this indicator is the increase in the number of non-contributors, due to informal employment, unemployment, and inactivity.
More than half of the population (55.5%) of working age (men from 20 to 64 years old and women from 20 to 61 years old) were not contributing to Social Security in 2022, according to the researchers. In absolute terms, out of a total of 129.5 million people of working age, only 58.9 million were contributors (45.5% of the total) and 70.7 million were non-contributors (55.5% of the total).
“With these demographic trends, it is expected that in the coming decades, the increase in the total number of beneficiaries will not only continue at a pace superior to that of the total number of contributors but could also lead to a situation of stagnation or even contraction of the latter group given the expected decrease in the population of working age,” the researchers wrote.
The study was based on data from the Continuous National Household Sample Survey (PNAD), population projections made by the Brazilian statistics agency IBGE in 2018 (complete data from the 2022 Demographic Census is still unavailable), and administrative records from pension systems. “The trend of worsening in the ratio between contributors and beneficiaries is the main diagnosis and is expected to persist even with a new population projection, the results of which could further worsen the indicator,” the researchers said.
Social Security experts agree that the ratio of contributors to beneficiaries has been declining over the years due to the aging of the Brazilian population and lower fertility rates. If measures are not adopted, the situation could deteriorate further in the view of experts consulted by Valor, especially with the increase in the number of temporary workers with fixed contracts or from online platforms, what has been termed as gig workers.
In the study, Mr. Nagamine and Ms. Ansiliero also calculate an estimate of the rate needed to fully fund Social Security, considering the contributions made by workers and employers. This rate would be 32.2% in 2022 and would reach 73.6% by 2060.
Luís Eduardo Afonso, a specialist in Social Security and associate professor at the School of Economics and Administration at the University of São Paulo (FEA/USP), said that the ratio between beneficiaries and contributors is what makes the rate needed to fund Social Security estimated at over 70% by 2060. In his assessment, one solution to avoid this would be to increase the minimum age and institute an automatic hike mechanism for this age as life expectancy increases. “There are no silver bullets,” he said.
Mr. Afonso also recommends that the government adopt measures to encourage formalization to increase the number of contributors, with an evaluation of the results of these policies, unlike what happens today with the Individual Microentrepreneur (MEI)—a program for certain professionals who work alone and wish to have their business taxpayer’s number, which grants them some rights, such as social security.
Former Social Security Secretary Leonardo Rolim advocates the implementation of a capitalization regime for private sector workers, to ensure the system’s sustainability in the long term. “The most sustainable systems in the world have a capitalization layer,” he said, recalling that the original 2019 Social Security reform proposal included this provision but the measure was eventually removed from the bill.
To increase the fertility rate, Mr. Rolim proposes that the government promote a policy in the labor market that provides greater protection for women, such as extending maternity pay for longer and offering a larger pension benefit for women with more than one child. He said that it is unlikely that women will return to having six or seven children, but measures like these could contribute to improving the indicator.
All the projections made by the study serve as a warning of the need for measures to ensure the long-term adequate financing of social security. “Currently, the political debate seems to be focused on short-term agendas, with no concern for financing in the medium and long terms,” the researchers wrote.
Hydropower dam collapses; 74 people are missing in the Rio Grande do Sul state’s worst disaster ever
05/03/2024
A bridge in Santa Maria was destroyed by floodwaters; heavy rains in the Rio Grande do Sul state this week forced 10,242 to leave their homes and 4,645 to be relocated to shelters — Foto: Mauricio Tonetto/Secom
Heavy rains in Rio Grande do Sul have killed at least 31 people and left 74 missing, in what is already considered the worst disaster in the state’s history. On Thursday (2), Governor Eduardo Leite confirmed the collapse of a dam linked to the 14 de Julho hydropower plant, on the Antas and Taquari rivers. Another 36 people were injured in the 154 municipalities hit by the extreme weather. In total, 71,300 people were affected by the storms, which forced 10,242 to leave their homes and 4,645 to be relocated to shelters.
The hydropower dam is located in one of the areas most affected by the heavy rains that hit the state in recent days, between the municipalities of Cotiporã and Bento Gonçalves. It was built to generate electricity to supply the region. The governor of Rio Grande do Sul admitted that there is a relevant risk of other structures collapsing due to the force of the water, especially in the metropolitan region of Serra Gaúcha. The state government decreed a state of emergency.
“There will be many deaths, unfortunately, and 204 municipalities are at greater hydrological risk. This is already and will be the worst disaster in the state’s history. The numbers are preliminary and incorrect given what is happening right now. There is a risk of dams bursting in the Serra Gaúcha region,” he said.
Given the scenario of crisis, the governor said the priority is to rescue stranded people. “There are patients who need hemodialysis and are in stranded municipalities. We have to bring drinking water to these populations. There are pregnant women that need to be relocated and corpses that need to be taken for burial,” Mr. Leite added.
The government also drew attention to weather forecasts related to the Guaíba River, which has risen above the alert level in the Porto Alegre area. “We estimate that the Guaíba River could reach 5 meters in height, a level greater than that recorded in the last biggest flood, in 1941.”
The governor held a press conference to address the heavy rains alongside President Lula, who visited the state on Thursday (2) and flew over affected areas. “A good meeting does better than a thousand phone calls for this alignment,” the governor said, thanking the president.
President Lula visited the city of Santa Maria with a delegation of ministers and secretaries. The municipality is one of the most affected by the storms and is located almost 300 kilometers from the capital Porto Alegre. On the site, President Lula promised that the federal government would spare no effort to assist the state.
“I made a point of bringing ministers here because I want each of them to pledge, not only before me but also before the press, of what we are committing to do in Santa Maria to mitigate the suffering that this extreme event is causing to the state”, the president added. However, the federal government has not yet detailed the funds to be transferred to the state of Rio Grande do Sul and its municipalities.
As a result of the president’s visit, Chief of Staff Rui Costa created a “situation room” to monitor events in the state. According to him, the room will hold daily meetings to receive demands from state authorities, including on Saturdays and Sundays.
“I ask that everyone remain on duty to provide an immediate response [to the state]. For example, in the healthcare area, it is crucial that we organize to contact municipal health secretaries because, most likely, these flooded cities will lose their stock of medicines and the health situation tends to aggravate,” Mr. Costa said.
The minister of the Secretariat of Social Communication (SECOM), Paulo Pimenta, defended that a new delegation return to Rio Grande do Sul in the coming days. “Maybe we will have to think about visiting the state again next week. There is no road to get anywhere, there are 141 points of closure,” said the minister, who is a licensed member of the Parliament for the Workers’ Party (PT) of Rio Grande do Sul. “We can’t get grocery supplies, fuel supplies. In healthcare, [the situation] is very serious as ambulances have no access. The situation is expected to aggravate in the next few hours,” he said.
Environment Minister Marina Silva, who is a member of the presidential delegation that traveled to Rio Grande do Sul, defended a fiscal exceptionalism similar to that adopted during the COVID-19 pandemic to allow the administrations to have funds available to invest in infrastructure.
“We will have to adopt exceptionalism so that, throughout the year, we can carry out interventions, including relocating people, making changes to the city’s master plan, or changing the entire infrastructure bidding process. Otherwise, we will keep building bridges that will collapse,” said the minister, according to Agência Brasil.
Citing data from the National Center for Monitoring and Alerts of Natural Hazards (CEMADEN), the minister emphasized that 1,038 municipalities in Brazil are at risk of extreme weather events, such as excessive rain or severe droughts, and this number should rise to more than 1,900 cities due to worsening climate change, also according to Agência Brasil.
With restricted credit at the beginning of 2023, groups raised R$30bn from investment funds
05/02/2024
Daniel Wainstein — Foto: Gabriel Reis/Valor
Companies that resorted to loans at higher rates during the credit crisis, especially from asset managers focused on stressed assets, known as “special sits,” are back at the table to refinance their debts. A survey by Seneca Evercore shows that these companies raised around R$30 billion in the first half of 2023—60% of the funds went to publicly-traded companies and another 40% to private companies.
With the credit tap turned off at the beginning of 2023 due to the Americanas accounting fraud, companies had to take on short-term debt to gain momentum at that time. “The problem is that most of these debts have started to fall due now, and new renegotiations are taking place,” said Daniel Wainstein, partner and CEO of Seneca, who has brokered for several clients in this situation.
Some of these companies have started taking out expensive credit again, but not at the same rate as in the first half of last year. Mr. Wainstein said that in the whole of 2023, the companies raised around R$40 billion in total with special sit managers. “The volume was higher in the first half of the year because the credit crisis was at its peak. The scenario began to change in August last year, with a certain return to normality.”
For the executive, the search for expensive credit this semester should be lower since the scenario for financing on the market is currently different compared to the same period last year. “If I had to make an estimate, I’d say that the volume of financing should end the semester at between R$15 billion and R$20 billion,” he said.
Companies such as the women’s fashion retailer Marisa, the textile industry Coteminas, the petrochemical company Unigel, the health group Elfa, and Pátria are among those that have had to resort to specialized funds to ensure they have enough resources to get through 2023. The Bodytech gym chain had part of its debentures bought by the Latache restructuring fund.
With the credit crunch, many retail companies had difficulties and turned to specialized funds for working capital. Marisa began a restructuring process, sold assets, and financed itself with the BTG Pactual bank’s restructuring company at the beginning of the year, according to sources familiar with the business.
Elfa, controlled by the Pátria fund, turned to Daniel Goldberg’s Lumina for an injection of R$620 million—part of which was converted into shares to give the company a boost. Sources linked to the company said that the healthcare company is refinancing its debts, but there are no significant maturities for this year. According to sources, the company should be the target of consolidation—Viveo was pointed out as a potential buyer, but there are no negotiations underway at the moment.
In the case of Bodytech, the company also had to restructure its debts due to the pandemic. Luiz Urquiza, one of the group’s partners, says the banks decided to sell part of the debentures they held—and Itaú’s share was traded to Latache last year. According to Mr. Urquiza, the company repurchased these debentures from Latache in March 2024, a decision made by the partners. The chain began to extend its debentures at the beginning of last year. The bonds total R$ 170 million, of which R$70 million are held by the controlling shareholders—in addition to Mr. Urquiza, businessman Alexandre Acioly is also a partner in the company. The bank debts total R$190 million. “In our case, our debate is not about survival. We are not at risk of out-of-court reorganization.”
In a prolonged negotiation process with creditors, Unigel’s controlling shareholders continue to roll over debt with special sits—and other suppliers—and are still seeking new capital for the group’s working capital, according to sources familiar with the matter. The petrochemical company, which signed an out-of-court reorganization agreement for debts of R$3.9 billion, has until May 20 to approve the plan, but negotiations with creditors remain challenging.
Also burdened with heavy debts, Coteminas is still negotiating with Farallon—the restructuring manager has invested in the company and is in discussions to negotiate debentures convertible into shares. Sources indicate that the textile company is seeking new resources with other managers specializing in stressed assets.
“Companies that turn to funds or investors focused on stressed assets are in a situation that won’t be resolved quickly,” noted Douglas Bassi, a partner at the restructuring firm Virtus. Mr. Bassi does not share Seneca Evercore’s optimism that the improved scenario could reduce the search for cheaper credit this year. “We’re not seeing much activity in the capital markets. I see a lot of agribusiness companies looking to restructure, and some of them are already in a more difficult phase,” he explained.
For Mr. Bassi, many companies are resorting to judicial recovery. “The macroeconomic scenario over the last year has not improved to the point where these companies are recovering.” Sérgio Machado, founding partner of ARC Capital, points out that for banks, high regulatory capital commitments make it nearly impossible to take on or keep credit assets on the balance sheet whose repayment scenario is based on conversion into equity. This capital ends up being provided by funds specializing in illiquid assets or bridging capital. According to Mr. Machado, given the high cost of capital in Brazil, successful restructuring processes involve monetizing assets, both operational and not, to generate liquidity for working capital and reduce liabilities.
Marisa, Unigel, and Elfa declined to comment on the matter. Coteminas did not respond to requests for an interview.
In its first year, the Lula administration has set a downward track for the federal government’s fiscal risks within the justice system, which had been on the rise and are a primary concern for the government starting in 2027, the year when all “precatórios”—IOUs issued by the judiciary branch—amounts will revert to primary expenses.
Data from the fiscal risk chapter of the 2025 Budget Guidelines Act indicate that the federal government’s exposure to judicial risks stands at R$3.601 trillion, down 4.2% from R$3.758 trillion at the end of 2022. This is the first drop since the transition from 2019 to 2020, after which the risk track record had increased.
The current amount does not yet account for the federal government’s gains from the lifetime pension revision thesis, ruled by the Supreme Court this year, as the figures were finalized considering outcomes until the end of 2023. Therefore, an additional R$480 billion remains to be deducted from the fiscal statistics.
“We have decided to set this track on a downward path, and my perspective is to deliver, during the president’s first term, this curve pointing downwards,” Jorge Messias, the federal attorney general, told Valor. “We cannot talk about a sustainable public debt track record without addressing the growing debt that will pressure the federal government’s budget, which is the court-ordered debts.”
Ms. Messias emphasized that the Federal Attorney General’s Office’s (AGU) strategy prioritizes reaching settlements when full wins in cases are unattainable. “Sometimes, it’s cheaper to acknowledge the rights still in the administrative phase than to move the decision to the courts. There have been administrations that chose to swap the budget for IOUs,” he said.
Moreover, according to Mr. Messias, in addition to seeking victories in court, there are “less obvious” strategies, such as settlements. “I joke that here at the AGU, I never lose. Either I win or I make a deal,” he said.
Despite the improvement in numbers, experts claim there are still risks in the scenario, as primary expenses for IOUs are on an upward track. Until 2027, the Lula administration received a waiver from the Supreme Court in the case that declared unconstitutional the establishment of a cap for IOUs in 2021, during Paulo Guedes’ tenure at the Ministry of Economy. Thus, it was permitted for the Lula administration to pay some of the court-ordered debts outside the fiscal rules until 2026.
A significant portion of the value that became a remote risk stems from favorable tax rulings for the federal government. This risk has been a priority for Finance Minister Fernando Haddad since the beginning of the year, with direct involvement in cases. He has even met with ministers on more significant issues, such as the Workers’ Severance Fund (FGTS) inflation adjustment trial, still pending review with an estimated impact of R$295 billion, and the lawsuit involving changes in the calculation base for the Business Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) on sales tax ICMS subsidies.
Lawsuits against the federal government are classified into three risk levels: probable, possible, and remote. Probable risk includes issues with a financial impact of R$1 billion or more that have had unfavorable rulings from the Supreme Court and Superior Court of Justice. Possible risk covers lawsuits already in the higher courts but not yet definitively judged—that is, when there has been some unfavorable decision by a collegiate body, but an appeal is still possible. Other lawsuits are considered remote risk and are not included in the fiscal risk schedules.
Possible risk actions decreased to R$2.586 trillion in 2023 from R$2.741 trillion in 2022, a drop of 5.7%. Probable risk actions slightly fell to R$1.015 trillion from R$1.016 trillion, a reduction of 0.1%.
The federal government’s risk classification considers the case phase—whether it is in a trial court or higher courts, for example, following the guidance of an AGU ordinance. This is different from the criterion used by companies in their risk analyses and provisions in financial statements, which consider the likelihood of winning or losing.
The classified lawsuits involve cases that could result in direct government expenses, the IOUs, as well as cases that will impact future projected revenue. This occurs, for example, when the government can no longer collect a certain tax or when there will be compensation.
One of the reductions in impact estimates last year occurred due to the Supreme Court ruling that recognized the incidence of social taxes PIS and Cofins on financial revenues. The risk estimated at R$115.2 billion was reclassified to remote. The merits were judged in 2023.
Three multi-billion cases awaiting decision from the Superior Court of Justice were also reclassified to remote after rulings in which the federal government won. The main one concerned the sales tax ICMS subsidies, with an estimated impact of R$47 billion. The decision upheld tax benefits related to the state tax in the calculation base of the Business Income Tax and Social Contribution on Net Income.
Also removed from the fiscal risk schedule were disputes about the crediting of social taxes PIS and Cofins in the resale of products taxed at a zero rate, estimated at R$31 billion, and the recognition that sales tax ICMS comprises the base of the Business Income Tax and Social Contribution on Net Income in presumed profit, with an estimated impact of R$2.4 billion.
One of the main topics that reduced the impact of non-tax lawsuits was the trial on the Pension Reform (as per Constitutional Amendment 103, of 2019) at the Supreme Court. The analysis has not yet concluded—may be finished next week—, but some votes have already led the federal government to estimate a reduction in impact to R$497.9 billion, compared to R$621 billion projected at the end of 2022.
The conclusion of another trial eliminated a risk of impact in this case, involving the calculation of the pension by family quota and per dependent. Another reason for the reduction was a change in the calculation methodology made by the Ministry of Social Security.
For federal public autarchies and foundations, the risk fell by R$2.5 billion. This happened due to the ruling on compensatory interest for expropriation for agrarian reform purposes, which limited it to 6% instead of 12%. The decision became final in 2023.
“The improvement in the fiscal risk estimates of the Budget Guidelines Act reveals that the government is succeeding in acting alongside the courts to uphold theses in favor of the Treasury and the Constitution,” said Felipe Salto, chief economist at Warren Investments. “Regarding the IOUs, it is necessary to develop better systems for identifying the conditioning factors of these expenses. The IOUs do not arise spontaneously.”
In 2023, the federal government created a fiscal risk committee involving the Federal Attorney General’s Office and the Ministries of Finance and Planning to monitor these fiscal risks. On average, the Attorney General receives 90,000 notifications per day. The expectation, in the coming years, is to act strategically, including the possibility of proposing legislative changes if necessary to keep judicial fiscal risks more controlled or, at least, more predictable.
Change comes just over two weeks after Brazil reduced the fiscal target for 2025
05/02/2024
Dario Durigan — Foto: Marcelo Camargo/Agência Brasil
Moody’s raised on Wednesday (1) Brazil’s Ba2 credit rating outlook to positive, from stable, indicating an improved chance of upgrading the country’s rating in the future. The agency cited positive GDP growth prospects and continued, albeit gradual, progress toward fiscal consolidation. The change comes just over two weeks after the country reduced the fiscal target for 2025 and 2026, which caused market stress and losses for domestic assets.
Last year, the other two main rating agencies—S&P and Fitch—upgraded the country’s rating. However, in the three agencies’ reading, Brazil remains below the best-rated countries, those with an investment grade. Despite the improved outlook, Moody’s cited negative aspects of the Brazilian economy, such as a high public indebtedness.
In the assessment released on Wednesday (1), Moody’s affirmed that GDP growth prospects are “more robust than in the pre-pandemic years, supported by the implementation of structural reforms over multiple administrations, as well as the presence of institutional guardrails that reduce uncertainty around future policy direction.”
The agency expects real GDP growth of around 2% in 2024 and 2025, on average. Over the medium term, the expectation is well above the annual average rate of a 0.5% contraction seen from 2015 to 2019.
“In the next few years, Moody’s anticipates growth will be broad-based extending to both the industry and the services sectors with domestic demand propelled by a strong labor market and higher real wages,” the agency wrote, also citing the government’s energy transition agenda.
The report also highlighted improvements in the monetary policy framework, strengthening of the Central Bank’s independence, improvements in the governance of state-owned companies, and measures to boost the business environment.
“The upcoming overhaul of the tax regime, while taking effect over a long period, also marks a notable structural reform,” the report says.
As for the fiscal scenario, the agency says the framework introduced last year is expected to result in gradual consolidation of public accounts. “Moody’s expects Brazil’s primary and overall fiscal deficits will narrow in 2024-2025 supported by revenue measures,” the agency said, projecting stabilization of government debt in a few years unless there is some type of shock in the economy. However, Moody’s points out that risks to fiscal consolidation efforts remain due to the government’s reliance on fiscal revenue growth and restricted ability to cut spending.
The maintenance of the Ba2 rating reflects “still relatively weak fiscal strength, given Brazil’s spending rigidity, high debt burden, and weak debt affordability.” The rating also takes into account Brazil’s sovereign credit strengths, which include a large and diversified economy, moderately strong institutions and governance, and a solid external position.
Among the factors that could lead to an upgrade in the rating, Moody’s cited an improvement in the primary result and fiscal deficits, which would enhance fiscal policy credibility, as well as continued solid GDP growth. Negative risks would be a weakening of the commitment to fiscal consolidation and, as a consequence, negative credit pressure. “Persistently low GDP growth would represent a credit-negative development that would adversely affect Brazil’s credit profile,” the report says.
Although the review of Brazil’s rating outlook by Moody’s is considered positive by the market, agents pointed out that the timing was unexpected, especially given the signals that the government has been sending in the fiscal area.
For Carlos Kawall, former Treasury Secretary and a partner at Oriz Partners, the government’s attempts to weaken the fiscal framework and structural reforms of recent years go in the opposite direction of the points cited by Moody’s.
“In recent months, the government has been taking steps towards weakening the framework, questioning the Central Bank’s autonomy and privatizations, and seeking to change the labor reform, while the improvement in the outlook is linked to these reforms,” he argues. “The intentions expressed to go backward in these reforms are in the opposite direction to the improvement in the outlook,” he points out.
Mr. Kawall argues that the government should not consider the outlook change as an endorsement of recent measures. “That would be an opportunistic reading. The change in the outlook is positive but it was made looking back, seeing reforms that ensure greater potential growth,” he said.
Alberto Ramos, head of Latin America economics research at Goldman Sachs, sees the new bias in the current rating as positive. “However, the timing was unexpected, following the market stress around the change in the trajectory of the government’s primary results,” he said. “Fiscal concerns have grown, not diminished. And a lot remains to be defined regarding reforms, including tax overhaul.”
In the opinion of Marcelo Fonseca, chief economist at Reag Investimentos, the change was “inappropriate” as it did not consider, for example, the shift in fiscal target announced last month. “It seems like we are talking about two different countries,” he said.
According to him, “the shift to a more flexible fiscal regime, as was the approved framework, does not place the country on a level of stability.” Furthermore, “fiscal targets are also very difficult to achieve.”
“Even from a political point of view, the government has struggled to defend its agendas in the Parliament, which will impact the primary result,” he said.
According to Mr. Fonseca, the change is not expected to have major impacts on asset prices. Combined with the fact that it does not change Brazil’s “speculative” grade, “investors know what the real risks of investing in Brazil are.”
The improvement in Brazil’s rating outlook was welcomed by the government. To Valor, Dario Durigan, executive secretary of the Ministry of Finance, said the review reinforces that the federal government’s economic agenda is “on the right track.” As examples of the strengths of the Brazilian economy, he mentioned “growing GDP, falling unemployment, increasing household income, strong external accounts, low inflation, and recovering fiscal [situation].” Mr. Durigan also emphasized the implementation of “important reforms” to increase the “productivity of the economy in the medium and long terms,” including tax overhaul.
Another source from the government’s economic team adopted a similar speech but acknowledged that the warnings made by Moody’s reinforce “the importance of not slacking off and remaining firm” in pursuing the balance of public accounts. For this source, the game “is not over”, and society “needs to continue supporting our agenda for the sake of the country.”
Government officials also used their social media accounts to comment on the change and highlight the roles of the Legislative and Judiciary branches. Finance Minister Fernando Haddad said the review “has to do with the joint work of the three branches of government, which placed the country’s interests above surmountable differences.” Minister of Planning and Budget Simone Tebet said there is a joining of “efforts by the government, Parliament, and the Judiciary to overcome budgetary challenges and boost our economy.” President Lula said Brazil “is once again respected worldwide” and “has credibility.”
*Por Augusto Decker, Estevão Taiar, Caetano Tonet, Gabriela Pereira — São Paulo and Brasília
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