Cenário-base do mercado é de ajuste fiscal pós-eleição. De novo?

The market's base scenario foresees fiscal adjustments post-election, but is this scenario new?

During a panel discussion, Christian Egan, CEO of B3, and key economists Fernando Honorato from Bradesco and Diogo Guillen from Itaú discussed the upcoming government's potential fiscal adjustments. A similar bet was made at the beginning of the Lula government, which resulted in a Selic rate of 14%, but this time, Honorato believes the conditions are more favorable.

Honorato stated that the debt situation is worse now, so the incentive for adjustment is higher, even if for the wrong reasons. He added that the political cost of inaction is significant. Honorato believes a real interest rate around 7.5% requires a primary surplus of about 4.5% of GDP to stabilize the debt. If real interest rates return to 4%, which is closer to Brazil's historical average, the effort would be around 1% of GDP.

The panel agreed that the impact of fiscal balance measures depends not only on the size of the adjustment but also on its credibility. They recalled that there was no primary surplus following the fiscal ceiling adoption in 2016, but credible measures led to a Selic rate decrease and a rise in risk assets. Currently, the executives believe a solid fiscal adjustment would primarily compress long-term interest rates.

Egan expects a reduction of about 100 basis points, while Honorato sees a potentially larger impact on the stock market due to a possible stronger economic expansion. According to Honorato, if Brazil achieves the same growth as it did in the past, with an average of 2.2% over the last 46 years, the rerating of shares could be enormous.

If no significant fiscal action occurs, the stock market would remain as it is, with no flow and discounting. However, the exchange rate could depreciate more than expected. Guillen and Honorato project some real currency depreciation in the coming months due to a likely US interest rate increase. Itaú expects the dollar to be around R$5.30, while Bradesco sees the American currency in the range of R$5 to R$5.20.