Synthesis of the Brazilian Economy

BRAZIL ECONOMICS - Report 07 Oct 2024 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

OVERVIEW

THIS TIME IS DIFFERENT (?)

Moody's decision to raise Brazil's credit rating from Ba2 to Ba1, with a positive outlook, bringing the investment grade carrot closer, was surprising and even awkward. The awkwardness stems from the risks associated with betting on a radical shift in fiscal policy direction, based on promises from a government that still does not have a plan to address the causes of the serious issues hindering the country’s sustainable development. The surprise comes from a wide range of evidence of economic imbalances, latent or explicit, that we have been discussing exhaustively in recent months, along with the outlook the political landscape allows us to project. It's worth examining the most significant imbalances, starting with public debt.

Centuries of history of countries (and households) show how easy and pleasant it is to spend, and how painful and difficult it is to exercise fiscal (budgetary) responsibility. The calls for spending are endless, some necessary, but most come packaged in cunning arguments, hidden under attractive disguises. In the 2009 book that empirically studies five centuries of financial crises, Carmen Reinhart and Kenneth Rogoff cite the most common argument used to justify "magical thinking," which gives the book its title. It comes from an old proverb, common in market squares, saying: "more money has been lost because of four words than from the firing of guns. These words are: THIS TIME IS DIFFERENT.“

This false argument comforts the unsuspecting while the inescapable effects are not yet fully visible. Debts whose dynamics do not tend toward sustainability increase the perception of risks, contaminating the exchange rate, requiring high interest rates, and causing crowding out of private sector investments, which reduces economic growth. This saying comes to mind when we observe the continued growth of public debt as a percentage of GDP since the current government took office, rising from 71.7% to 78.5%, and is expected to reach 84% by 2026, at a pace of approximately 3 percentage points per year.

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