The impact of increasing debt on the future of the economy will depend on two crucial points. The first is that the expansion of public spending is temporary and restricted to measures related to Covid-19 – Brazilian history, however, indicates a certain difficulty in the country in ending benefits granted in times of crisis. Another relevant issue at the moment is the political crisis, which may cause the government to lose control of the debt trajectory.
“The most important thing for us to have growth after this crisis is the maintenance of low interest rates. For this, it is necessary to signal that the increase in spending is transitory”, says economist Pedro Schneider, from Itaú Unibanco. An increase in permanent public spending may raise the Brazilian debt to levels that investors consider there is a risk of insolvency, which would raise the interest rate requested by them to lend to the country.
According to Schneider’s calculations, this year’s primary deficit (government expenditure minus revenues, excluding interest spending) is expected to reach 10.2% of GDP – the initial target was 1.6%. With the increase in spending and the expected fall of 4.5% in economic activity, the debt will reach 92% of GDP, indicate Itaú’s estimates.
The economist adds that, if the debt path continues to accelerate in 2021, the risk to economic growth increases considerably, especially if other countries manage to stop the pandemic now and do not need to increase spending next year. This is because, in comparison with other markets, Brazil would be in a situation of even greater deterioration.
“So far, approved spending is transitory. But the longer the outbreak of the disease lasts, the greater will be the pressure for the government to continue helping in 2021. Then the risk increases, especially if other countries deal well with the health crisis and do not continue to increase spending next year. It is important to take appropriate measures so that the outbreak does not continue. “
Reforms
Chief economist at BNP Paribas Asset Management, Tatiana Pinheiro agrees that, for the time being, the expenditure announced does not “seem abusive”, but highlights the importance of signaling “in a credible way” that the reform agenda will continue after the pandemic. “If there is no signaling and if spending is not optimized, we will reduce the capital interested in investing here”, she says, who projects that the debt will reach 96% of GDP this year.
The political crisis in the government is another item, according to economists, that can cause an explosion of debt and slow growth even further. For Silvia Matos, from the Brazilian Institute of Economics (Ibre-FGV), the lack of coordination in the economic plan to combat the crisis may make spending now less effective. “We are losing a little of the notion of the magnitude (of expenses).
At a time like this, it takes agility and leadership. When you have this confusion, the bill can be more expensive. This is reflected in an increase in country risk and interest rates “, says Silvia.
Sources close to the Ministry of Economy already see the risk that the government is losing the so-called “fiscal anchorage”, a set of rules and adjustments capable of allowing the sustainability of public accounts. The chief economist of MB Associados, Sergio Vale, also highlights that the political crisis must have a negative impact on the economy.
According to him, the increase in spending now will require reforms in the future that President Jair Bolsonaro will not be able to lead.
“The level of debt of this size will require a high degree of political articulation to put the (debt) trajectory on the path. And we will not have that,” he says. Vale projects that the debt will reach 93.7% of GDP this year and 98% in 2021.
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