New Projections: No Great Changes
We assume the government will have reasonable success in winning approval of the proposed constitutional amendment (PEC) to cap the nominal adjustment of public spending at the previous year’s inflation, and sends to Congress a proposal for social security reform that establishes minimum retirement ages compatible with the country’s demographic reality. But pressures exist to introduce “greater flexibility” in the rules on adjustment of expenditures, and for a “softer reform” of the social security system. If the government yields to these pressures, it will aggravate the perspectives for the primary results and gross public debt, with negative consequences on inflation and the basic interest rate.
The contraction of GDP in 2016 will be slightly less than our previous projection (-3% against -3.5%), but we hew to our forecast of 1% GDP growth in 2017. Renewed growth will depend on intertwined conditions. It relies on higher fixed capital investments, requiring lower risks, in turn depending on the success of the fiscal adjustment reforms. But it also depends on lower interest rates, and for this the Central Bank needs a successful fiscal adjustment. The two authorities – fiscal and monetary – have to play a cooperative game, whose success depends not only on their technical competence, but also fundamentally on political support in Congress.
The change in the inflation projection for 2017 is only marginal, rising from 4.7% to 4.9%. Considering that due to the fiscal problem the Central Bank also has to consider GDP growth, although this is outside its remit, the scenario for easing the SELIC rate has not changed: it should reach 10.75% at the end of 2017.
Because of the absence of favorable impulses from international commodity prices and global exports, the trade surpluses will decline due to increasing imports, marking the start of rising current account deficits.
Even if the spending cap PEC is approved, the primary deficit in 2016 will be 2.8%, followed by a deficit of 2.1% in 2017, causing a new rise of the gross public debt, which in 2017 should reach 80% of GDP.
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