The first months of the new government
The new government will have to quickly obtain the political support necessary to achieve fiscal consolidation, to put the country on the road to stronger cyclical recovery and sustained growth. But at the outset it will face four major challenges.
The first is how to react to the worse international situation, characterized by slowing world growth and appreciation of the dollar.
The second is how to act with respect to the diesel subsidy, which if maintained will hinder meeting the spending cap, but if eliminated will raise inflation, adding another force for elevation of the interest rate.
The third is its attitude regarding the rule for adjustment of the minimum wage. The logic, in light of the weakness of the job market and with the benefit of the labor law reform enacted by the Temer government, would be for real wages to decline to help economic recovery.
Finally, it will have to face a high concentration of maturing public debt. In its favor, it will count on the high Treasury Cash Balance (Conta Única do Tesouro), which can be used to redeem debt, but its conduct in this case, combined with the progress toward fiscal consolidation, will be fundamental to determine whether its next steps will lead to a rise or fall of the risk premiums.
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