Exchange rate reached highest level in more than a year after federal government presented new fiscal targets

04/17/2024

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Fernando Haddad — Foto: Diogo Zacarias/MF

Finance Minister Fernando Haddad said on Tuesday in Washington that news from abroad explain “two-thirds” of what is happening domestically.

The rise in the exchange rate in the last two days coincides with the government’s new fiscal target, which now forecasts a zero result in 2025, compared to the previous prediction of a surplus of 0.5% of GDP. On a bad day for emerging currencies in the world, the exchange rate rose 1.64% on Tuesday, to R$5.2697 per dollar, the highest closing level since March 23, 2023, with an intraday high of R$5.2873.

According to Mr. Haddad, among the factors that affect the exchange rate are data that indicate heated economic activity in the United States, U.S. inflation data “that has not yet been fully digested,” and the escalation of the conflict in the Middle East after Iran attacked Israel, with an impact on the price of a barrel of oil.

For the minister, the rise of the exchange rate in Brazil is also due, in part, to turbulence caused by the disclosure of the new fiscal target. “It is necessary to better explain over time what will happen to Brazilian government accounts.”

The minister said that the new goal is realistic and embodies learning from the government in recent months. He also argued that the goal aligns with the long-term aim of stabilizing public debt.

Analysts said, however, that as long as the primary surplus does not come close to 1% of GDP, gross debt will continue to rise. The government had previously envisioned achieving an economy of 1% of GDP in 2026, but now sees this only happening in 2028 — therefore, in a new presidential term. For 2026, now the forecast is for a surplus of 0.25% of GDP.

Mr. Haddad said that Brazil is experiencing a week of turbulence and that, after this tense moment, “things will settle down.” However, he took the opportunity to say that it may be a good time to “rethink strategies.”

“The external scenario isn’t helping. As for the domestic scenario, we are correcting it by dialoguing with the federal government and the National Congress. Since the issue is more delicate, let’s now take a moment to rethink the strategy and redefine the role of each one to restabilize expectations.”

Mr. Haddad gave examples of programs such as the Emergency Program for the Rebound of the Events Sector (PERSE), whose rapporteur, Congresswoman Renata Abreu, defends tax waivers of R$5 billion per year. He is in Washington for the biannual meeting of the IMF and the World Bank.

“We understand that Congress has its goals, but we have to bring this program close to normal, close to reasonableness. It is very unrestrained, open to fraud—there has been fraud and the Federal Revenue Service is combating it.”

Mr. Haddad said the country cannot get off the “growth track.” “What is happening today is a message to the federal government, it is a message to the National Congress, it is a message to the justice system, it is a message to the Finance Ministry, it is a message to Planning Ministry, it is a message to the Central Bank. Let’s understand and reposition. We have no reason from the point of view of the fundamentals of the Brazilian economy to get off the correct track of making this country grow again with low inflation and job generation,” he said.

After the new IMF projections for the Brazilian economy, he said he expected the organization to review “for the better” the country’s GDP growth estimates. “We will also follow what happens in the global economy because we depend on it too.”

The IMF said on Tuesday that it expects the Brazilian economy to grow by 2.2% this year and 2.1% in 2025. The forecast for Brazilian GDP this year is 0.5 percentage points higher than that released by the Fund in January. The forecast for next year was raised by 0.2 percentage points.

The IMF’s projections are higher than those of the Focus survey, collected weekly by the Central Bank, forecasting a GDP increase of 1.95% this year and 2% in 2025.

“We continue to project 2.2% [of GDP growth in 2024], although activity indicators are heated. We are receiving good news from the end, both from the point of view of collection and from the point of view of production and sale. Credit is particularly increasing in Brazil. However, we will be parsimonious, we will continue to maintain our expectation of 2.2%, but with a small upward bias,” he said.

Mr. Haddad also said he believes that, despite the turmoil, there is room for interest rate cuts.

According to him, the fundamentals of the Brazilian economy “are better than a year ago.” For him, the adjustments made by the government ensured an improvement both from the point of view of revenue and the point of view of expenditure. However, he expressed concern about Social Security finances after recent bills passed by Congress, adding that the government is likely to appeal in the courts.

“We’re not going to have the primary spending that we had last year. We’re not going to have the primary revenue that we had last year. The revenue will be much better, the expense will be much lower. Where do the tax receipts come from? From the measures that Congress passed,” he said.

Asked about the exhaustion of the measures, he answered that the extension of the tax relief, especially in the municipalities, was not on anyone’s radar.

“The payroll relief is something that bumps into the Social Security reform, which everyone defended, from this point of view, all the time. All political parties argued that Social Security could not lose revenue. Then comes an amendment, in a bill. The president vetoes, overturning the veto, and we reopen the discussion,” he said.

*Por Alexandra Bicca — Washington

Source: Valor International

https://valorinternational.globo.com/