Recession and High Interest Rates in an Election Year
With the fiscal anchor destroyed by the Precatórios PEC, and inflation closing 2021 above 10%, the Central Bank will have to maintain monetary policy in restrictive territory for the foreseeable future. The SELIC rate at the start of 2021 was 2% and will end at 9.25%, with further increases assured in 2022, taking it to 11.75%. The ex-ante real interest rate (the rate relevant to the behavior of the real side of the economy) should temporarily reach almost 6% (versus a neutral real rate of about 3%). Therefore, the aggregate demand channel will be activated due to the Central Bank’s inability to act through the expectations channel, provoking contraction of GDP, which we estimate will be 0.5% in 2022, after expanding by 4.9% in 2021.
The fiscal framework is in tatters, and the results of 2021 were strongly affected (for the better) by inflation. In 2021, the primary deficit likely reached 1.1% of GDP, with a decline of the gross debt to 80.6% of GDP. In 2022, the primary deficit should amount to 0.8% of GDP, with a gross debt of 86.6% of GDP at the end of the year.
Assuming an average exchange rate of R$ 5.70/US$, deceleration of global imports and slower growth of international commodity prices, in 2022 Brazil should have a trade surplus of US$ 36 billion and a current account deficit of around US$ 35 billion. Even with declines of portfolio inflows and net direct investments, that deficit should maintain the balance of payments near zero.
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