Inflation, Easing of Risk and Appreciation of the Real

BRAZIL ECONOMICS - Report 02 Jun 2021 by Affonso Pastore, Cristina Pinotti and Paula Magalhães

Since the conclusion of the agreement over the budget, the risk premiums have been falling, especially that involving the exchange rate. This movement has accentuated with the recent publication of the GDP figures for the first quarter. This is partly due to the increased revenues generated by the stronger economic growth than previously expected, working to reduce the primary deficit. Consideration also must go to the effects of inflation. Besides reducing the primary deficit, which despite the spending of R$ 110 billion above the ceiling should reach 2.8% of GDP this year, inflation acts to reduce the debt/GDP ratio. Since its driving force is the depreciated exchange rate, the implicit deflator of GDP will grow by 10% in 2021, inflating the base of the debt/GDP ratio, which should close the year at around 87.9%, lower than the 89.2% that happened in 2020. In the short run, there is unquestionably an improvement, which is not the fruit of good public policies, but only of inflation. Since the approval of the spending cap in 2016, the only reform that has reduced expenditures is that of the pension system, which is insufficient.

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