A Risk Not Yet on the Market’s Radar Screens
Because of the deep recession, some policymakers have proposed that the increase in public spending should not be restricted to the authorization obtained from the approval of the “wartime budget”. This is not the stance of Economic Minister Guedes, but this cannot be said about the influential views of Rogério Marinho, minister of regional development, and Pedro Guimarães, CEO of Caixa Econômica Federal, to mention only two examples. Debt dynamic exercises show that in this case, the growth of the debt/GDP ratio might become unsustainable. But another risk exists, not yet on the markets’ radar screens. Over past 12 months, Brazil now has a balance of payments deficit, which due to the acceleration of capital flight should increase even with the expected decline of the current account deficit. The capital flight trend is one of the causes why the Real has depreciated more than the currencies of other emerging countries. Since the current account deficit is equal to the excess of absorption in relation to GDP, if the government were to choose fiscal expansion, this would at least diminish the expected decline. Besides this, the increase of public spending would raise the country’s risk perceived by non-resident investors, and increase the capital outflow, in turn increasing the balance of payments deficit, forcing the sale of reserves, and accentuating the depreciation of the exchange rate. In this report, we show that all periods of accumulation of reserves in the country occurred when capital inflows were strong and the exchange rate was appreciating, irrespective of whether the current account balance was positive or negative, high or low. By increasing the risks perceived by non-residents, an expansionary fiscal policy would accentuate the capital outflow and worsen the current account balance picture. For this reason, the government cannot rationally consider abandoning the spending cap commitment.
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