Behavior of the Yield Curve Reflects Implicit Inflation Rates
In recent days, the nominal rates at the long end of the yield curve (DI curve) have fallen. That movement predominantly reflects the decline of the implicit inflation rates, with a smaller reduction of real interest rates. Before the approval of the fiscal framework, the real interest rates on the long end of the curve were slightly higher than 6% a year. Then the lower perceived likelihood of exponential (explosive) growth of the public debt brought it down to about 0.8 percentage point below the previous level. Although the “tail risk” has fallen, the fact that the only guarantee provided by the framework is that yearly growth of real expenditures will be in the interval between 0.6% and 2.5%, without any assurance of revenue growth to enable complying with the primary result targets, there is no way to rule out new growth of the risk premiums, with the real yield curve again shifting upward.
Our projections for the central government’s result are primary deficits of 0.8% of GDP in 2023, and 0.9% of GDP in 2024. This is our “baseline case”, in which the gross debt climbs to 76.6% of GDP in 2023 and 81.6% in 2024. In the more favorable scenario, supposing the government manages to obtain all the revenues necessary to meet the primary result targets, the public debt would reach 80.4% of GDP in 2024 and 84.5% of GDP at the end of Lula’s current term.
We project GDP growth of 1.8% in 2023, leaving a negative carry-over of 0.5% to 2024, which will be partly offset by an increase in government spending. Due to the success in lowering inflation, through a strongly restrictive monetary policy, 2023 will close with the SELIC rate at 13.25%, and will reach 10% at the end of 2024. With this, inflation this year should be 5.3%, and 3.7% in 2024.
Despite the decrease of commodity prices in relation to the average for 2022, exports will be boosted by record farm harvests and growth of world exports, which according to the IMF should increase by 2.4% in 2023 and 3.5% in 2024. Due to the weak performance of gross fixed capital formation, imports should fall in 2023. According to the level of imports estimated by the method employed by the Central Bank, this year the trade balance should be US$ 67 billion, leading to a current account deficit of US$ 32 billion. In turn, the current account deficit in 2024 should fall to US$ 15 billion.
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