November 2024 - Page 4 of 4 - Murray Advogados

Study reveals legislative power over city budgets and federal influence loss over mayors

11/04/2024

In the past four years, parliamentary budget allocations to municipalities have nearly doubled the amount voluntarily transferred by the federal government to local administrations, according to an exclusive study by the technical advisory team of Congressman Pedro Paulo obtained by Valor.

These sums are already significant relative to what smaller municipalities receive annually from the Unified Health System (SUS), the Fund for Maintenance and Development of Elementary Education (FUNDEB), and the Municipal Participation Fund (FPM).

The report highlights the growing influence of the Legislative branch over city budgets, particularly in smaller municipalities, and the declining federal government influence over mayors. From 2016 to 2020, the federal government allocated R$66.4 billion to municipalities through voluntary transfers, while parliamentary allocations totaled R$43.6 billion. Between 2021 and 2024, this trend reversed: mayors received R$96.5 billion endorsed by lawmakers, compared to R$49.9 billion in discretionary federal funds.

This figure masks that in 2023, half of the R$21.3 billion in discretionary spending by the Lula administration in municipalities was directed by congressional indications. This resulted from a deal to pass the so-called Transition Constitutional Amendment Proposal (PEC). In exchange for releasing R$170 billion for the Executive, Congress maintained control over “secret budget” funds, which the Supreme Court had abolished the previous year.

According to the study, the federal government’s voluntary transfers to municipalities were mainly through discretionary ministry funds and the former Growth Acceleration Program (PAC). These Executive resources reached R$27 billion in 2020, during the pandemic. Since then, Congress has assumed control over these funds by creating the so-called rapporteur allocations (popularly known as the “secret budget”), expansion of other transfers, and the end of PAC. Municipal allocation funds increased to R$28.8 billion in 2024 from R$7.8 billion in 2019, a 269.2% growth.

Parliamentary preference is for transfers to municipalities. Last year, the amount reached R$23.1 billion, equivalent to 15.2% of what they received from the Municipalities Participation Fund (FPM)—distributed based on population size and local income, historically the primary revenue source for small cities. For state governors, lawmakers and senators’ allocations totaled R$4.5 billion in 2023, just 3.5% of the R$129.3 billion received via the State Participation Fund (FPE).

Regarding health and education funds, the smaller the city, the more significant the impact of parliamentary transfers. In municipalities with fewer than 5,000 inhabitants, the average per capita budget allocation was R$355.80, equivalent to 71% of what they received from SUS and 36.5% of FUNDEB (although not all municipalities in this category received all three transfers). In contrast, those with over 50,000 inhabitants received R$105.2 per capita—24% of the funds from SUS and 12% from Fundeb.

The data also show that the lower the Human Development Index (HDI), the higher the value allocated by parliamentarians. Municipalities with an HDI below 0.600 received R$263 per capita. Those with an HDI between 0.600 and 0.750 received R$143 per inhabitant, while those with an HDI above this range received R$47 per resident.

On the other hand, the study also points out significant discrepancies among municipalities. “There is a notable concentration of entities receiving amounts below R$200 per inhabitant [in 2024],” it said. The average value was R$236.30 per resident, but 89 locations exceeded this by almost four times, reaching over R$919.

“The ten municipalities receiving the least per capita allocations [in 2024] had a total of R$6.7 million for a population of 3 million, averaging R$2.20 per inhabitant,” the report noted. Leading this list is Itaí (São Paulo), with R$21,500 in parliamentary transfers for its 25,900 residents, equivalent to R$0.80 per capita. The list also includes the capital, Belém, with R$3.7 million in allocations for a population of 1.4 million.

“Conversely, the ten municipalities with the highest per capita transfers totaled R$76 million for a population of just 33,000, with an average transfer of R$2,300,” the study said. Davinópolis (Goiás), with 1,900 residents, tops the list with R$2,745.40 per capita.

Twenty-six cities received more from direct transfers to states and municipalities without the need for agreements than from the FPM. Of Roraima’s 15 towns, 12 are in this situation. This method is favored by mayors and congress members because it allows funds to arrive more quickly, as it doesn’t require a project submission or federal government evaluation. However, it faces criticism for its lack of transparency.

Lawmaker Pedro Paulo, who commissioned the study, believes the data show that although parliamentary allocations require improvement, they have effectively delivered federal resources to where people live. “What I’m highlighting is that transparency needs significant improvement. However, parliamentary transfers are a channel for more Brazil and less Brasília,” he said.

The lawmaker argues that municipalities face public pressure for actions that fall under state and federal government responsibilities and parliamentary allocations are a way to empower them after years of revenue concentration in the federal government. “In the Rio de Janeiro election, the primary topic was public security, which is a state responsibility,” he said.

He suggested, as part of the study, reserving 3% of parliamentary allocations for municipalities with up to 10,000 inhabitants and an HDI below the national average, creating a “national portfolio of local investment projects,” and allocating funds to cities that improve their fiscal and public policy indicators, along with implementing more transparency, traceability, and growth control rules.

“There’s no doubt that we have a Frankenstein compared to other countries, but wait. Just like FUNDEB, SUS, FPM, and FPE, it’s a resource that somewhat reduces the federal authoritarianism of the government. Even if unintentionally, in a haphazard way, it is taking on a redistributive and progressive character,” he said.

*By Raphael Di Cunto, Marcelo Ribeiro — Brasília

Souarce: Valor Inernational

https://valorinternational.globo.com/

Market anticipates policy rate to hit 12.5% per year by mid-2025; some forecasts suggest a return to 13%

11/04/2024

Amid a deteriorating economic outlook and tighter financial conditions since September, the Central Bank’s Monetary Policy Committee (COPOM) is expected to take a more aggressive stance in its current tightening cycle. An acceleration of the Selic policy rate hike to 50 basis points is widely anticipated by the financial market, which has revised its expectations for the base interest rate upward. However, even with this adjustment, inflation is projected to drift further from the 3% target within the relevant horizon.

Of the 125 financial institutions surveyed by Valor, only three expect a smaller hike of 25 basis points. The rest anticipate that the COPOM will act decisively, raising the Selic rate by 50 basis points to 11.25% per year in response to the significant deterioration in economic conditions. Contributing factors include the Brazilian real’s depreciation to R$5.90 per dollar, worsening inflation data, a persistently heated labor market, and increasingly pessimistic inflation expectations as reported in the Focus Bulletin and the breakeven inflation rate market.

The market sentiment is reflected in asset prices. On the yield curve, the probability of a 50-basis-point hike stands at 74% versus a 26% likelihood of a 75-basis-point hike. In the digital options market, the chances of a 50-basis-point increase were at 86% by Friday’s close, while the probability of a 75-basis-point increase stood at 10%.

Itaú Unibanco’s superintendent of economic research, Fernando Gonçalves, cites notable shifts since September as justification for a quicker pace of tightening, especially the currency devaluation. At its last meeting, the Central Bank modeled scenarios with the FX rate at R$5.60 per dollar, but the updated FX rate for this meeting is closer to R$5.75.

“This brings an important inflationary push. We’re also observing a tightening labor market, inflation expectations above the target, and lingering uncertainty about the U.S. election outcome, which could impact U.S. interest rates. All of this signals a need for higher rates in Brazil,” Mr. Gonçalves explained.

The market’s upward revision of Selic rate expectations began following the release of the COPOM’s third-quarter Inflation Report, which projected inflation above target through 2026 and into early 2027. Many in the market interpreted this as an indication that interest rates must rise even further to achieve the 3% target.

According to XP Asset Management’s chief economist Fernando Genta, to bring inflation back to 3% within the relevant timeframe, the COPOM would likely need to raise the Selic rate to around 15% in the current tightening cycle. Although Mr. Genta’s official projection is for a lower base rate of about 13% by mid-next year, he believes any effective tightening must counter not only the effects of expansionary fiscal policy but also the impact of the recent rate-cutting cycle, which took the Selic from a peak of 13.75% to 10.5% between August 2023 and May this year. “I don’t think 15% is excessive. The challenge is how much disinflation we need to implement in an economy that’s growing beyond its potential,” Mr. Genta, a former assistant secretary in the Economy Ministry, remarked.

Mr. Genta anticipates that the Central Bank will likely pursue a more gradual path toward reaching the inflation target, favoring a moderated tightening cycle that brings the Selic to 13%, with a series of 50-basis-point hikes, beginning with this week’s meeting. “Given the data, I believe the Central Bank could move even faster, but signals from its directors suggest otherwise,” he notes.

Central Bank officials recently attended meetings in Washington during the International Monetary Fund (IMF) and World Bank annual gatherings, where market participants gauged that the threshold for a sharper 75-basis-point hike remains high. This perception has reinforced expectations of a 50-basis-point hike cycle.

Despite these expectations, the yield curve is pricing in an extended tightening cycle. As of Friday, the market projected the Selic rate would reach between 13.75% and 14% in 2025, essentially returning it to levels seen until 2023, when the Central Bank initiated the easing cycle.

Considering current inflation trends and recent currency pressures, Barclays’s chief economist for Brazil, Roberto Secemski, sees “a clear upside risk” to his projected 12% peak for the Selic rate by the cycle’s end.

However, a slight reduction in fiscal stimulus, emerging signs of potential economic slowing, and easing wage pressure from recent employment data have led Barclays to maintain its current outlook of two more 50-basis-point hikes followed by a final 25-basis-point hike in January.

Mr. Secemski is watching closely for the communication strategy the COPOM will use this week, particularly in a climate of heightened volatility from domestic fiscal risks and the upcoming U.S. election. “The COPOM will have to decide whether to leave its guidance open, as it did in September, to preserve credibility or indicate an intention to continue the current pace for the next decision,” he explains.

Mr. Secemski notes that these options carry trade-offs. If the COPOM avoids guidance on its next steps, the yield curve could respond by pricing in a possible acceleration in December. Conversely, if the committee signals a commitment to 50-basis-point hikes in December, this may cap the market’s expectations, which could be seen as restrictive and counterproductive as the Central Bank seeks to bolster credibility.

Mr. Secemski’s baseline scenario is that the COPOM will likely opt for open-ended guidance, “especially given domestic fiscal uncertainty and the approaching U.S. elections.” The Barclays economist believes the Central Bank will likely prioritize flexible communication rather than locking itself into a specific future course.

Luiz Felipe Maciel, chief economist for Brazil at Bahia Asset Management, expects the tone of the Central Bank’s communication to remain “tough.” He anticipates that the COPOM’s inflation projections will indicate further deterioration, even with the elevated interest rates factored into the Focus Bulletin.

Mr. Maciel does not foresee a meaningful reduction in fiscal stimulus in 2025, which he believes will keep the economy heated and inflation under pressure. “Some fiscal stimuli directly benefit those more likely to spend. There’s fiscal injection happening, and states and municipalities are also increasing their expenditures,” he says. He notes that if the government implements significant fiscal adjustments, it could alleviate pressure on the Central Bank, marking “the first concrete signal since the administration began that spending could indeed decrease.”

Given the current economic environment, Mr. Maciel sees the risk tilted toward even higher interest rates than Bahia Asset’s 13% projection. “With unemployment heading toward 6%, everyone will need to revise their inflation forecasts,” he adds.

While he initially disagreed with the Central Bank’s decision to resume tightening in September, André Leite, chief investment officer at TAG Investimentos, now projects that the Selic rate will reach 12.5% by the end of the cycle. According to the Central Bank’s model, this level should bring inflation down to 3.15%, provided rates remain high for an extended period. However, Mr. Leite expects political pressure on the Central Bank to intensify by the second half of next year, with interest rate cuts beginning in September and bringing the Selic to 10% by 2026.

“This 13.5% priced in by the market would likely bring inflation closer to 2% rather than 3% over the relevant horizon. Even with our projection of 12.5%, maintaining that rate for 18 months seems unsustainable given the level of pressure to reduce rates,” says Mr. Leite. “We expect the Central Bank to begin rate cuts by September 2025, continuing down to 10% by 2026. We believe the decision to start cutting will be driven more by political than technical considerations.”

From a communication perspective, Mr. Leite suggests that “the ball is in the fiscal court.” He describes the upcoming meeting as “more about buying time than making a significant shift in monetary policy.”

*By Gabriel Caldeira, Gabriel Roca, Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/