Structural Fiscal Adjustment for the Desynchronous Economy

Fiscal Adjustment is the central theme of this article, which addresses the current situation of the Brazilian economy, marked by a mismatch that requires deep reflection on the measures necessary to restore fiscal balance.

We will discuss high inflation, rising public debt, and the challenges posed by loose fiscal policy versus tight monetary policy.

Analyzing the impact of these conditions on currency stabilization and ensuring a sustainable future for the Brazilian economy will be essential to understanding the path forward.

Brazilian Economy Out of Sync and Permanent Fiscal Adjustment

The report highlights that the Brazilian economy is out of sync, requiring a important permanent fiscal adjustment to avoid further imbalances.

Recently, Brazil has faced challenges such as:

• high inflation which is above the target;
• unanchored economic expectations;
• accelerated growth of public debt;
• erosion in the current account balance

These factors profoundly affect the country's economic stability, requiring rapid and coordinated responses from the authorities.

On the other hand, the combination of loose fiscal policy and tight monetary policies strengthens the real in the short term, but may weaken the currency in the long term.

Structural fiscal adjustment should focus on achieving structural primary surpluses to resolve the economic issue effectively.

The lack of signaling about spending cuts or revenue increases continues to increase the burden on the Central Bank, putting pressure on high real interest rates which are necessary in the short term, but insufficient to correct the economic course without an efficient fiscal movement towards surpluses.

This fiscal uncertainty keeps the risk premium for medium and long-term securities, demanding concrete and targeted actions.

High Inflation and Unanchored Expectations

In Brazil, the high inflation has been a persistent challenge, directly affecting the daily lives of citizens and the country's economic performance.

This complex scenario is further aggravated by the unanchored expectations, which imply a widespread loss of confidence among consumers and investors.

This vicious cycle not only affects purchasing power but also makes business and investment planning difficult.

The inflationary out of control is driven by several factors, such as the increase in production costs and the exchange rate devaluation, as mentioned in reliable sources such as the C6 Bank Blog.

“The persistence of high inflation rates undermines purchasing power and makes it difficult to anchor expectations, increasing the challenges of economic policy.”

Such a situation requires a coordinated response between fiscal and monetary policies to restore credibility.

The Central Bank, as noted in reports, continues to adjust interest rates, but the absence of a robust and structured fiscal adjustment hinders the necessary progress.

Therefore, significant fiscal measures are essential to ensure the path to economic balance, as well as to attract new investments and foster a more stable economic environment.

Fiscal and External Imbalances

Fiscal and external imbalances go hand in hand in Brazil, increasing vulnerabilities and limiting the responsiveness of economic policy.

The interdependence between these issues is critical to understanding the trajectory of the national economy.

Below, we analyze two critical axes that illustrate this interaction.

Rising Public Debt and Erosion of the Current Account Balance

A growing public debt Brazil's debt represents a significant challenge, as it puts pressure on fiscal credibility and increases the cost of debt rollover, making the country more vulnerable to confidence shocks.

Furthermore, the erosion of the current account balance expands dependence on foreign capital, instrumentalizing the international market as a crucial factor for sustaining the domestic economy.

These two economic indicators are moving in worrying directions, exacerbating the urgency for a sustainable and permanent fiscal adjustment that stabilizes investor expectations and strengthens the country's external balance sheet.

In particular, rising debt requires Brazil to adopt stricter and more effective economic policies, potentially as a structural adjustment, as highlighted by economists.

This adjustment needs to be reflected in the country's ability to generate primary surpluses that can balance debt in the medium and long term.

Additionally, linking to the latest data provided by Central Bank, it is understood that the reduction of international reserves exerts more pressure on the national currency, leading to possible exchange rate fluctuations with intensive inflationary impacts.

Therefore, it is imperative focus on reforms that aim to correct these imbalances to avoid uncertainty in the country's economic future.

Loose Fiscal Policy versus Tight Monetary Policy

The combination of loose fiscal policy It is tight monetary policy in Brazil generates a series of economic challenges.

Initially, this duality of policies may seem beneficial, guaranteeing some positive effects in the short term.

As noted, this interaction results in:

1. temporary strengthening of the real;
2. partial containment of inflation through high interest rates;
3. considerably high cost of domestic financing.

However, these benefits are often short-lived and can lead to major complications.

The restrictive effect of tight monetary policy tries to neutralize, without much success, the expansive impacts of loose fiscal policy.

This tension between macroeconomic policies can increase risk for investors, contributing to an environment of uncertainty in the financial market, as highlighted by Persio Arida in his article in Valor.

Furthermore, it can intensify public debt, resulting in a high fiscal burden on future governments, as mentioned by analysts in Goldman Sachs report.

This growing divergence in policies could not only undermine economic competitiveness but also harm the sustained growth of the Brazilian economy in the long term.

Without fiscal and monetary balance, the currency's resilience could fade, threatening future economic stability.

The Urgency of a Structural Fiscal Adjustment

In Brazil's current economic context, it is essential to analyze the disparity between monetary and fiscal policy.

O increase in interest rates emerges as a fundamental tool in the fight against inflation, but it does not, in isolation, resolve the complex fiscal situation that the country faces.

As highlighted by in-depth analyses, the Central Bank's effectiveness has been limited due to a lack of significant spending cuts or robust revenue-raising initiatives.

This worryingly shifts the weight of rebalancing to monetary measures, exacerbating high interest rate cycles and negatively impacting private investment.

In pragmatic terms, only one structural fiscal adjustment, comprehensive and lasting, promises to restore balance to public accounts and anchor market expectations in the long term.

Therefore, any hesitation in implementing a clear fiscal strategy guarantees the maintenance of high capital costs and reaffirms the unsustainability of the public debt trajectory.

Associates such as Goldman Sachs highlight the importance of achieving structural primary surpluses to reduce exchange rate volatility.

A critical message here is the warning to the Central Bank, which, without the support of a fiscally conscious government, will see its capabilities progressively limited.

Consequently, a commitment to fiscal reforms becomes imperative to mitigate the high risk premium observed in medium- and long-term bonds.

Fiscal Uncertainty and Risk Premium in Medium- and Long-Term Bonds

A fiscal uncertainty in Brazil it can be compared to a rough sea that the investor needs to cross.

When these waters are turbulent, confidence diminishes, and the fear of not reaching the other side increases significantly.

Consequently, to face this challenging journey, the market demands a high risk premium.

This is because investors, when lending to the government, seek compensation for potential future instability that could impact returns.

Every swing in fiscal sentiment directly impacts the cost of public financing, increasing interest rates and thus complicating debt sustainability.

To mitigate the risks associated with fiscal fluctuation, a robust and permanent fiscal adjustment is essential.

Without it, rising interest rates, as discussed in an article in Forbes Brazil, only puts more pressure on finances, fueling a spiral of costly refinancing.

In times of global risk aversion, this fragility intensifies, highlighting the symbiotic relationship between risk and confidence, similar to sailing in calm versus stormy seas, where calm suggests security and a storm is synonymous with imminent financial danger.

Fiscal Adjustment is, therefore, a pressing need for Brazil.

Without effective measures towards structural primary surpluses, fiscal uncertainty will continue to raise investment risks, hindering sustainable economic growth.