Insight Focus

A feeling of uncertainty about public accounts is growing. This hasn’t been helped by recent floods. The departure of Roberto Campos from the presidency of the Central Bank is also on the radar.

Dollar Exchange Rate and Fiscal Uncertainty Are Reason for Concern

Rarely has the issue of public spending and the direction of the economy been so evident in Brazil. Amid the floods in Rio Grande do Sul, with losses exceeding BRL 1.3 billion in agribusiness alone, economists reveal a feeling of uncertainty in relation to public spending and the conduct of Brazilian economic policy.

Factors such as the worsening perception of fiscal risk, with the difficulty in reducing the public deficit, and the departure of Roberto Campos Neto from the Central Bank in December are on the market’s radar.

The impact on the dollar exchange rate is one of the most visible signs of this unease. In April, the exchange rate depreciated 3.5%, closing at BRL 5.19. It may not seem like much, but in the view of economists, it is something that signals a more complex issue.

We spoke with Gabriel Barros, chief economist at Ryo Asset and former director of the Independent Fiscal Institution (IFI), about the topic. Read the interview below. 

Gabriel Barros, chief economist at Ryo Asset. Source: publicity photo/Gabriel Barros.

How has sentiment in Brazil changed regarding the economy and the exchange rate?

We must think about the reasons behind the strengthening of the dollar. Right now, the fact that the dollar has strengthened is less important than why. It’s something qualitative. The perception is that there has been a worsening of the fiscal situation — that is the country’s ability to control its expenses and revenues, among other things. There is also a feeling that the change of command at the Central Bank, in December, will cause changes in Brazilian fiscal and economic policy. 

Source: Brazilian Central Bank

What is the market’s perception of the change of command at the Central Bank?

Roberto Campos Neto leaves the institution in December, as planned. In his place, a less orthodox economist should step in, aligned with the government’s vision. One of the economists most likely to replace Roberto Campos as president of the Central Bank is Gabriel Galípolo, who served as executive secretary in the Ministry of Finance of the current government and is now a member of the board of directors of the Central Bank. The expectation is that the political agenda may interfere with the conduct of the Central Bank, since Galípolo is close to the government, which has generated noise.

And would this already be causing concerns in relation to investments and the Brazilian economy?

Yes. In my view, the appreciation of the dollar is mainly a result of this. It is important to say that even if another economist is appointed to the presidency of the Central Bank, the feeling is that it will probably be someone aligned with the government. The government’s vision is that the State should drive economic development. From a practical point of view, this could mean, for example, lowering the interest rate with the aim of facilitating consumption and taking out credit even if inflation has not decreased. 

Source: Central Bank.

Is this what the market fears?

Exactly. This fear began to grow as the names being considered to preside over the Central Bank were circulated and, at the same time, an increase in public spending was observed. It is a set of factors, with some more preponderant than others.

Do externalities also have an impact on this perception?

Yes. We cannot forget that the US is unlikely to lower interest rates in the short term and Brazilian investors will look with increasing interest at the US market. The US is considered trustworthy, and the dollar is seen as a safe investment. In favor of Brazil, we have the perception that the number of emerging countries that attract international investment has been reduced, with Russia on the sidelines and other countries subject to political and economic noise, such as Turkey. 

Source: FRED of St. Louis.

What is the market’s feeling about the future of the Brazilian economy? 

If the vision I presented is confirmed, we can expect consequences for the exchange rate, with a higher dollar and a greater outflow of capital to other countries. If the interest rate falls without keeping up with the fall in inflation, there may also be an increase in prices. Now there is also the issue of flooding in Rio Grande do Sul, which requires emergency financial assistance. What helps us is that we are a large exporter of commodities — something beneficial for the trade balance. 

Source: Central Bank.

What could be done to change the perception about the direction of the economy?

In my view, there should be a spending review and an effort to reduce the fiscal deficit, which is historically high in Brazil. Even compared to other emerging countries, our public spending is high. Our tax burden is also high, so a series of revisions would need to be made for the country to start growing sustainably.

Source: Central Bank. 

Carla Aranha

Carla joined Czarnikow in 2022 having previously worked at Exame and Valor, leading economic media outlets in Brazil, where she developed projects and news coverage focusing on the agribusiness and commodities markets. Carla is responsible for writing content, providing interesting article´s subjects and reports as well as producing press releases together with the marketing team.

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