Alberto Ramos Director of macroeconomic research for Latin America at Goldman Sachs
The change of fiscal goals last week proves that the government wants to spend more to heat up the economy and that the market was right to doubt the trajectory of primary results presented by the Ministry of Financesays the director of macroeconomic research for Latin America at the American bank Goldman Sachs, Alberto Ramos.
In an interview with Estadão/Broadcast, he warns that there is still a risk of a change in the 2024 target, of zero deficit, and even in the 2025 target, changed from a surplus of 0.5% of GDP to zero result. And this uncertainty in the fiscal area, according to the economist, weighs on the rating sovereign of the country.
“The fiscal issue and the low potential growth of the economy, the low productivity growth in the economy, are the two factors that probably delay obtaining investment grade a little”, he states.
Read the main excerpts from the interview.
Does the change in fiscal targets show less willingness on the part of the government to make a fiscal adjustment?
This commitment never existed in a serious way. The market never believed, never valued this framework as a fiscal anchor. If the objective was for it to function as an anchor, it failed, because the market perception is that we will have primary deficits as far as the eye can see. These target revisions prove that the market was right to suspect that the targets were not credible. They were no longer ambitious, did not stabilize the debt dynamics and required a very strong increase in the tax burden. This shows two things: the government wants, through all the instruments at its disposal, to keep the economy robust; and considers public spending as an essential instrument. I’m not saying that it’s easy to deliver primary surpluses and that the government doesn’t want to, but what has value is doing things that aren’t easy. And the urgency of this is obvious and blatant.
The president of the BC, Roberto Campos Neto, has said that the market may start to focus more on the fiscal problem, due to the increase in global debt. Could this drive foreign investors away from Brazil, which has high debt by the standards of emerging countries?
It may not be enough, but it is a point of vulnerability. If the external scenario changes and, suddenly, there is greater concern about fiscal dynamics at a global level, and global interest rates start to rise because of the risk premium, this will hit Brazil. And Brazil, in this regard, starts in a weak position: it has primary deficits, high debt that continues to grow and a Tax Burden which is already very high. Since the transition PEC, the tax burden has increased significantly and not to generate primary income, but to support expenses. This is complicated because it doesn’t solve the problem and, as you increase the tax burden, you have less room to deal with a problem in the future.
Does this rule out Brazil’s chance of reaching investment grade?
Undoubtedly. The fiscal issue and the low potential growth of the economy, the low productivity growth in the economy, are the two factors that probably delay obtaining investment grade a little.
Alberto Ramos says there is a possibility of further revisions to fiscal targets Photograph: Felipe Rau/Estadão
The government brought forward the debate on the 2025 fiscal target at a time when the market was still debating the possibility of changing the 2024 target of zero deficit. In your opinion, is there a chance that this year’s target will still be changed?
Exist. Some evaluations show that perhaps revenue is still overestimated and expenditure is underestimated. The same applies to 2025. Of course there are extraordinary revenues, dividends from Petrobras, and that would help, perhaps, to mitigate the hole. But I think it is quite possible that before the end of the year the 2024 target will be revised downwards, and also that of 2025. The market expects a deficit of between 0.6% and 0.7% of GDP and, if I am right , there will be more revisions.
Will this erode the country’s fiscal credibility?
This started in 2023. Even excluding payment of court orders, in 2023 the government has already delivered a fiscal result that is much worse than the Treasury’s indicative target. In 2024, we will follow the same path. In 2025, they already recognized it and, in 2026, they are already thinking that they cannot deliver. This does not exempt the government from responsibility: the government controls spending and, if it does not have revenue, it has to adjust spending. Unless you don’t think tax goals are important. Everything is more important than controlling spending. We have to respect a little more that Brazil is already heavily in debt and we can’t spend on everything we want.
Recent statements by the president of the Central Bank, Roberto Campos Neto, put an end to the consensus that the Copom would comply with the forward guidance and cut the Selic rate by 0.5 percentage points at the May meeting. Has the Goldman Sachs landscape changed?
No. We always had a 0.25 point cut in June. What is at risk now is May’s decision. President Campos Neto is communicating very clearly to the market that the forward guidance it has always been a conditional prescription. Now, global uncertainty has increased a lot: there is a war in the Middle East that seems to be intensifying, greater concern about inflation dynamics in the United States, with the Fed seeming to want to push the beginning of a normalization of monetary policy. The basic scenario is changing. Inflation expectations for 2025 started to rise a little, the exchange rate moved a lot. There is a repricing of financial assets that probably even changes the balance of risks. And there is the tax issue. The cat climbed onto the roof.
Is there a risk that the BC will have to interrupt the cycle of cuts with the Selic rate still in double digits?
Definitely yes. Before these events, there was already a minority of analysts who had a double-digit terminal rate. I had 9.5% since mid-2023, but the market had 9%, some houses had 8.75%. And I would even say that, between the end of 2023 and the beginning of 2024, I thought that, if I had to change my projection, it would be lower. Today, I am very comfortable with this number and I would even say that the risk is well distributed and that it is possibly for more.
Why?
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The BC is dealing with inflation projections well above the target this year and slightly above the target in 2025, with unanchored inflation expectations, with the product gap already well closed, with the labor market under considerable pressure, with wage dynamics incompatible with productivity gains. And, last but not least, with a fiscal and parafiscal policy that, every day, has a stimulus announcement. The economy may even do better than expected, because there is an avalanche of fiscal stimulus. This means that the BC has to go slowly, that there is the possibility of having to end the cycle at a higher level, potentially in double digits. And now, the external world seems to be directing in that direction.
What weighs more heavily on the BC, the global repricing of assets or fiscal uncertainty, after the change in targets?
The BC is not the Treasury’s psychologist, it is not a risk rating agency that grades fiscal policy. Fiscal policy affects inflation expectations, affects exchange rate dynamics and, being more or less expansionary, affects the output gap. These are inputs of the inflation projection model. Both external and fiscal factors enter the model indirectly, through the impact they have on asset prices, the risk premium and the subjective assessment of the risk balance. Which is the most important? It’s difficult to say, and I would say it doesn’t really matter, because they are both heading in the same direction.
The debate over who will be the next president of the BC has not yet gained traction. Could it have new impacts on market expectations for the Selic rate in the second half of the year?
I don’t like to pre-evaluate potential candidates, I like to give them the benefit of the doubt. The risk exists, of course. But I would say this: let’s imagine that this risk materializes, that you make a transition to a much more dovish, which takes some inflation risk and cuts interest rates below what would be prudent. This experiment would be doomed to failure, because it would not generate growth and would lead to a very significant increase in the risk premium in the intermediate and long part of the curve and a very significant devaluation of the exchange rate. We saw this way back, during President Dilma Rousseff’s term, when the BC took some risks and financial conditions ended up becoming tighter, not less. The risk is this: less growth, not more. If anyone tries, they will quickly be forced to correct it.
Tags: market suspect fiscal targets credible Goldman director
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