Framework became a “piece of fiction”, says Stuhlberger, and Verde resets Treasury IPCA+

The change in the primary surplus target for 2025 and 2026, announced by the Government last month, changed Verde Asset Management’s view on the fiscal game. “This 2025 PLDO was a ‘game changer’ huge amount of what to expect from this government in fiscal terms”, highlighted Luis Stuhlberger, CEO and CIO of the house at the manager’s event aimed at investors, this Tuesday (7).

With a very critical tone, the executive highlighted that the fiscal framework had become a “piece of fiction” and that now what he thought was “noise” became “signal”. “We are back to the risk of the inspector and the great ease of changing the framework has called his credibility into question”, he summarized.

On April 15th, the Central Government’s primary result target in 2025 stopped being a surplus of 0.5% of the Gross Domestic Product (GDP) and moved to a framework of balance between revenues and expenses (zero deficit).

As the new fiscal framework allows a tolerance band of 0.25 percentage points up or down, the new objective would allow a deficit of up to 0.25% of GDP next year without the government incurring non-compliance − which would result in sanctions and the activation of fiscal triggers.

The 2025 PLDO also revised the promise of the 2026 primary result, the last year of the current government. In this case, the target goes from a surplus of 1% of GDP to 0.25% − which is equivalent to a positive balance of R$33.1 billion for revenues compared to expenses.

In the Government’s calculations, expenditure growth projections would reach 2.5% and 2.6% in 2025 and 2026, respectively. Verde estimates, however, that, if those entering Social Security and the payment of the Continuous Payment Benefit (BPC) continue to grow at the current rate, this increase in expenses would go to 3.4% and 3.7%, in that order, in 2025 and 2026.

Title exchange

Keeping an eye on recent changes made by the Government, the house also made relevant changes to its portfolio. One of the most significant involved the exchange of public bonds linked to inflation (NTN-Bs), maturing in 2035, for positions Treasury Inflation-Protected Securities (TIPS)maturing in five and 10 years.

In practice, such American securities have their yields linked to the country’s inflation index and are usually used to protect investors’ portfolios against devaluation caused by increased inflation, as occurs with NTN-Bs.

“The objective is to have the same asset, removing some of this risk that is to come in the next two years”, summarized the manager. The position in TIPS represents 40% of the fund’s net assets now, while the allocation in NTN-Bs has been practically zeroed.

The house also has positions in fixed-rate bonds maturing in 2025 and 2026. According to Stuhlberger, there are prizes and money to be won in these maturities, but it is necessary to prepare for “suffering” and strong volatility. For the executive, the inspector could cause another scare if he continues to be treated in an “irresponsible” manner under the command of President Luiz Inácio Lula da Silva (PT).

Look at Copom

The expectation is that the changes in the primary surplus targets for the next two years will also lead the Central Bank’s Monetary Policy Committee (Copom) to adopt a more hawkish (more inclined towards monetary tightening) in the decision this Wednesday (8), assesses the CEO of Verde.

“Roberto Campos Neto’s reaction function [presidente do Banco Central] to this budget is to be more hawkishbut we will see the message post-PLDO 2025″, he added.

Less allocated to Brazilian shares

Changes also in the local share portfolio of the Verde fund, the house’s flagship. According to Stuhlberger, the allocation on Bolsa Brasil now accounts for 10% of the portfolio, compared to 15% previously, while the position in the global stock market was maintained at 5%.