{"id":92059,"date":"2024-12-02T17:13:04","date_gmt":"2024-12-02T20:13:04","guid":{"rendered":"https:\/\/murray.adv.br\/?p=92059"},"modified":"2024-12-02T17:13:08","modified_gmt":"2024-12-02T20:13:08","slug":"market-frustration-over-fiscal-plan-fuels-new-wave-of-deterioration","status":"publish","type":"post","link":"https:\/\/murray.adv.br\/en\/market-frustration-over-fiscal-plan-fuels-new-wave-of-deterioration\/","title":{"rendered":"Market frustration over fiscal plan fuels new wave of deterioration"},"content":{"rendered":"\n
Lack of fiscal sustainability drives projections for a stronger U.S. dollar and higher interest rates<\/em><\/h6>\n\n\n\n

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12\/02\/2024 <\/p>\n\n\n\n

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The long-awaited announcement of Brazil\u2019s fiscal measures, which had been seen as a potential stabilizer for domestic assets amid worsening conditions in global markets, has instead fueled further deterioration in local prices. Experts warn that higher levels for the U.S. dollar and a steeper Selic policy rate hike may be necessary to mitigate the impact on inflation and market expectations.<\/p>\n\n\n\n

For Drausio Giacomelli, chief strategist for emerging markets at Deutsche Bank, the recent sell-off in Brazilian assets reflects concerns over fiscal measures that could worsen the country\u2019s financial outlook, compounded by the expansion of income tax exemptions.<\/p>\n\n\n\n

\u201cIt was confirmation that there is no meaningful fiscal adjustment on the horizon, with debt nearing 80% of GDP and a fiscal deficit close to 10% of GDP\u2014figures typically seen in wartime economies,\u201d he said. Of the R$70 billion in projected savings for 2025 and 2026, only about R$40 billion is likely to materialize, as much depends on social program audits and Congress refraining from diluting the measures, Mr. Giacomelli added.<\/p>\n\n\n\n

This sentiment is echoed by Ricardo Car\u00e1 Monteiro, chief investment officer at EQI Asset. \u201cAfter a year of government measures focused mainly on increasing taxes, there was great expectation for a spending-focused adjustment plan,\u201d he said. \u201cInvestors grew impatient as the government lost credibility, exacerbated by clashes between the president and the market, which raised the risk premium. Now, instead of measures addressing fiscal concerns, we got more exemptions and more taxes. It was a bucket of cold water,\u201d he said.<\/p>\n\n\n\n

Mr. Giacomelli warns that further deterioration in Brazilian markets is still possible, even with future interest rates stabilizing around 14% and the exchange rate per U.S. dollar at R$6. \u201cThere is still room for things to get much worse. In crises, investors look to historical references. Without anchors for exchange rates and debt, the currency and interest rates lose benchmarks,\u201d he said. \u201cR$6.5 would not surprise me.\u201d<\/p>\n\n\n\n

Luiz Eduardo Portella, partner and manager at Novus Capital, noted that the market had hoped for signs of debt stabilization but instead saw a government already focused on the 2026 elections. \u201cThis will lead to a new, worse equilibrium for the market,\u201d he said.<\/p>\n\n\n\n

Mr. Portella said the \u201cfloor\u201d for the dollar has risen again, increasing the likelihood of further exchange rate deterioration. \u201cPreviously, if the market calmed, the dollar could fall back to R$5. Now, seeing the dollar below R$5.80 is difficult,\u201d he added.<\/p>\n\n\n\n

Alexandre Silv\u00e9rio, CEO of Tenax Capital, avoided setting a ceiling for the exchange rate but said he would not bet on the real until fiscal and monetary policies align to provide clearer visibility on public debt dynamics.<\/p>\n\n\n\n

The weakening real is expected to fuel inflation further, potentially requiring higher interest rates. \u201cThe Central Bank has become a passenger at this point but must remain firm in its communication, as Gabriel Gal\u00edpolo has been doing,\u201d Mr. Portella said.<\/p>\n\n\n\n

Novus had maintained bullish positions on interest rates and equities, expecting the fiscal package announcement to mark a positive turning point. \u201cBut after the disappointment, we closed those positions. We are now long in U.S. equities, holding small short positions on Brazilian stocks, and betting on interest rates and the dollar,\u201d Mr. Portella said.<\/p>\n\n\n\n

For Mr. Giacomelli, of Deutsche Bank, the new scenario may require Brazil\u2019s Central Bank to adopt a \u201cshock treatment\u201d to prevent inflation from spiraling out of control and posing a greater risk to financial stability. He expects the Monetary Policy Committee (COPOM) to raise the Selic rate by 75 or 100 basis points at its December meeting. \u201cI\u2019m leaning toward 100 basis points,\u201d he said.<\/p>\n\n\n\n

\u201cWe must prepare for a substantial increase in the neutral interest rate and inflation. It\u2019s not an exaggeration,\u201d Mr. Giacomelli said, referencing the term structure, which now projects a Selic rate between 14.5% and 15% by the end of the tightening cycle next year.<\/p>\n\n\n\n

Congressional role<\/strong><\/p>\n\n\n\n

As the constitutional amendment (PEC) and related bills progress through Congress, Mr. Portella of Novus said some reversals might signal a more positive trajectory. \u201cBut Congress won\u2019t act unless the government leads,\u201d he said.<\/p>\n\n\n\n

To reverse the sharp deterioration in domestic assets, Mr. Silv\u00e9rio of Tenax emphasized the need for the economic team to regain control of the fiscal adjustment process. \u201cIt\u2019s increasingly clear that [Finance Minister Fernando] Haddad is losing influence. Both the content and presentation of the package show the political wing has dominated the economic wing,\u201d he said.<\/p>\n\n\n\n

While fiscal issues remain a major concern, Mr. Silv\u00e9rio highlighted the appointment of Nilton David to the Central Bank\u2019s monetary policy board as a positive development. \u201cNilton reinforces the perception of the Central Bank\u2019s strong independence. It doesn\u2019t resolve the fiscal challenge but eliminates fears of a looser monetary policy worsening inflation expectations,\u201d he said.<\/p>\n\n\n\n

Mr. Silv\u00e9rio also noted that the current environment has created opportunities to increase positions in local equities, citing attractive valuations and improving microeconomic conditions for companies in terms of profit growth and business resilience, particularly in the utilities and shopping mall sectors. \u201cStock prices are at levels where we don\u2019t need to take risks on highly leveraged companies,\u201d he said.<\/p>\n\n\n\n

Even if the income tax exemption is not approved, Mr. Car\u00e1 Monteiro of EQI Asset doesn\u2019t foresee an improvement in risk perception. \u201cThe market remains poorly supported. The government missed an opportunity to re-anchor fiscal credibility, and chances of reversing the exaggerated risk premium have vanished,\u201d he said.<\/p>\n\n\n\n

EQI Asset has reduced its exposure to Brazilian equities to almost zero, cut its interest rate positions to 20%, and maintained no exposure to Brazil\u2019s real. \u201cWe have no appetite. We\u2019re staying out and watching from the sidelines, which is likely what many are doing,\u201d Mr. Car\u00e1 Monteiro said.<\/p>\n\n\n\n

*By\u00a0<\/strong>Gabriel Roca,\u00a0<\/strong>Gabriel Caldeira,\u00a0<\/strong>Bruna Furlani\u00a0e\u00a0<\/strong>Arthur Cagliari\u2014 S\u00e3o Paulo<\/p>\n\n\n\n

Source: Valor International<\/p>\n\n\n\n

\nhttps:\/\/valorinternational.globo.com\/\n<\/div><\/figure>\n","protected":false},"excerpt":{"rendered":"

Lack of fiscal sustainability drives projections for a stronger U.S. dollar and higher interest rates 12\/02\/2024 The long-awaited announcement of Brazil\u2019s fiscal measures, which had been seen as a potential stabilizer for domestic assets amid worsening conditions in global markets, has instead fueled further deterioration in local prices. Experts warn that higher levels for the […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8106],"tags":[25672,25673],"class_list":["post-92059","post","type-post","status-publish","format-standard","hentry","category-murray-news","tag-market-frustration-over-fiscal-plan","tag-new-wave-of-deterioration"],"yoast_head":"\nMarket frustration over fiscal plan fuels new wave of deterioration - Murray Advogados<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/murray.adv.br\/en\/market-frustration-over-fiscal-plan-fuels-new-wave-of-deterioration\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Market frustration over fiscal plan fuels new wave of deterioration - Murray Advogados\" \/>\n<meta property=\"og:description\" content=\"Lack of fiscal sustainability drives projections for a stronger U.S. dollar and higher interest rates 12\/02\/2024 The long-awaited announcement of Brazil\u2019s fiscal measures, which had been seen as a potential stabilizer for domestic assets amid worsening conditions in global markets, has instead fueled further deterioration in local prices. 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