Facing Challenges
Despite important political victories, such as approval in the Chamber of Deputies of the proposed constitutional amendment (PEC) to cap real spending growth, in the next fiscal policy moves the government will face substantial difficulties. The first is the worse outlook for growth in 2017, which will force the government to revise its projection, frustrating its expectation for revenue growth. The second is the aggravation of the fiscal crisis of the states, in particular Rio de Janeiro.
The perspectives would be better if the Central Bank could cut the interest rate faster. Its task would be facilitated by a stronger capital inflow, causing the real to appreciate and providing room to lower the interest rate more quickly. This would bring a faster and stronger return of growth, boosting revenues and facilitating the fiscal adjustment task. But the change in the perspectives for capital flows after Trump’s election has changed the outlook for appreciation of the real, and even though the severity of the recession provides room for a steep drop of the SELIC rate, this might well be less pronounced in 2017 than previously appeared to be the case.
In this report we review the most recent data on the real side, concluding that (unfortunately) the perspectives for growth in 2017 have worsened, making the fiscal adjustment harder. We also look at the balance of payments, where there are clear signs that the trade surpluses will remain high, not due to the recovery of exports, which continue to shrink, but rather the drop in imports provoked by the reduction of investments and weak economic activity. Despite the capital repatriation program, the trend is still one of net outflows.
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