Binding fiscal constraints imply binary 2021 outcomes, Continued monetary stimulus depends on fiscal consolidation, Despite uncertainties, our 2021 outlook is rather benign. I agree with the use of all cookies. Those efforts have, so far, encountered severe resistance and we expect them to continue to fail. The combined effect of the larger spending and the recession-related drop in tax collection should result in a major fiscal deterioration in 2020, as you can see in the chart below. Cookies are small, simple text files stored in your computer, tablet or mobile phone when you visit a website or use an app. Get this from a library! Governments have two main ways to influence their economies: Monetary policy is the actions taken by a country's central bank to regulate interest rates, control the supply of money and the amount of funds banks must hold rather than lend to their customers. You can decide which cookies to allow and can change your cookie settings at any time. Keywords: Brazil’s hyperinflation, Stabilization plans, Fiscal deficits * This is a chapter in the book The Monetary and Fiscal History of Latin America, … The monetary easing was perhaps the most forceful in EM (considering the current level of the policy rate, i.e. We expect an appreciation bias for the BRL to gradually emerge throughout 2021 however, as external accounts continue to improve and fiscal risks abate, helped by the recovery and falling debt servicing costs. There are two other growth-enhancing drivers we would highlight. The monetary and fiscal history of Brazil, 1960-2016. JEL classifications: E42, E63, H62, H63 . A corollary of our fiscal assumption is that fiscal policy will turn contractionary in coming years, paving the way for a prolonged period of expansionary monetary policy. I want to use all functionalities on this website. constant over time. They are also invaluable to increase a country’s readiness to respond to a crisis and to help with the recovery and beyond. The monetary easing was perhaps the most forceful in EM when you consider the current level of the policy rate of 2%, relative to the ten-year historical average of 10%. Much more consequential has been the fiscal stimulus enacted, especially the household income transfers to help offset wage income lost to Covid-19 movement restrictions. and with a tendency to drop. I want to use all functionalities on this website. I want to use limited functionalities on this website and agree to the use of strictly necessary cookies only. BACEN did not close the door for additional rate cuts but the bank also called into question the existence of much scope to ease further. I agree with the use of all cookies. Monetary policy addresses interest rates and the supply of money … The persistent FX sell-off has been the primary side-effect of that easing, which is, arguably a minor concern in the … It peaked around 100 percent per year in 1964, decreased until the first oil shock (1973), but accelerated again afterward, reaching levels above 100 percent on average between 1980 and 1994. In that case, this would be the first time since mid-2019, when the SELIC rate stood at 6.5%, that a policy meeting ends without authorities lowering the policy rate. “ Fiscal policy continues to be the Achilles heels of the Brazilian economy. Much more consequential has been the fiscal stimulus enacted, especially the household income transfers to help offset wage income lost to Covid-19 movement restrictions. By 2019, government expenses are projected to exceed the spending cap imposed via a constitutional amendment in 2017. In conclusion, the macroeconomic coordination between monetary and fiscal policies in Brazil was virtually a substitute policy throughout the study period, with a predominantly monetary regime, in opposition to the non-Ricardian policies of the Fiscal Theory of The Price Level. But this is a hard call that largely depends on hard-to-predict political negotiations in Congress. During our sample time period, the monetary policy rate also changed substantially, although it remained high. indexation in accounting for the unique features of inflation dynamics in Brazil. Headline inflation remains low (2.4% year on year), but its composition has exacerbated concerns as food prices have surged (8.8%), adding a negative newsflow/political dimension to the inflation outlook that had been absent until recently. In principle, and judging by the 2021 budget submitted to Congress, there’s still enough leeway to adjust public spending to ensure that long-term fiscal dynamics remain anchored. Inflation has been above the central bank’s target for the past several years. The persistent FX sell-off has been the primary side-effect of that easing, which is, arguably, a minor concern in the current low-inflation environment. It would exacerbate fiscal risks, elevate risk premium levels and, eventually, stimulate the dollarisation of local portfolios, forcing the central bank to tighten monetary policy, resulting in further deterioration in the fiscal outlook. Some cookies are necessary, while others make the website more personal and relevant to you. We currently expect Brazil’s GDP to contract by 4.3% in 2020, among the best results in LATAM, and to grow by 3.9% in 2021. Inflation risks have risen, amid fast-rising food prices and global supply disruptions, but high unemployment and spare capacity suggest that price pressures are likely to be temporary. Current price pressures generally reflect supply shocks, strong global demand for foodstuff or FX pass-through that are likely to be temporary in nature. [João Ayres; Márcio Gomes Pinto Garcia; Diogo A Guillén; Patrick J Kehoe; National Bureau of Economic Research,] -- Brazil has had a long period of high inflation. Monetary policy, fiscal policy and public debt management ... Brazil’s policy flexibility was enhanced by a number of critical policy reforms in the 1990s and 2000s, including the switch to an inflation targeting regime; concerted actions by the central bank This compares with consensus estimates of -5.3% and +3.5% respectively. Brazil’s faster-than-expected post-lockdown recovery stands out in LATAM, Inflation pressures rise, but from a very low base, Heightened fiscal uncertainties should linger as Congress considers changes to fiscal framework, All eyes on Congress as political brinkmanship intensifies towards year-end. We may share information about your use of our site with our social media, advertising and analytics partners. FISCAL RULES AND FISCAL POLICY IN BRAZIL ... the fiscal and monetary policies. Learn more about how we use cookies in our cookie statement. But should Congress opt to weaken Brazil’s fiscal stance further, that monetary stimulus is likely to be far too short-lived to sustain the economic recovery in 2021 and beyond. As seen in the chart below, retail and industrial activities are on-track to fully recover from the March/April collapse but service activities have lagged and remain about 13% below pre-pandemic levels, while still presenting less certain recovery prospects. As it stands, the fiscal tightening dictated by current law would pave the way for a credit-fuelled virtuous cycle and higher growth. As evidenced, for example, by the 2002 IMF working paper titled ‘The Effectiveness of Fiscal Policy in Stimulating Economic Activity: A Review of the Literature‘, there is a long-standing theoretical controversy, both worldwide and in Brazil, on the effects of public spending on wider economic dynamics. As seen with the approval of the new regulatory framework for natural gas and private sector investment in water/sanitation services, the outlook for crucial infrastructure investment is positive, if fiscal uncertainties abate somewhat. more. We may share information about your use of our site with our social media, advertising and analytics partners. The second is the more competitive FX rate, which should help local producers so long as the inflation outlook remains anchored, as we expect. The persistent FX sell-off has been the primary side-effect of that easing, which is, arguably a minor concern in the current low-inflation environment. Our bias is for a better-than-expected 2021. Brazil’s public sector (nominal) deficit should rise towards 18%-of-GDP while (gross) debt-to-GDP is expected to suffer the largest increase across LATAM majors, rising by about 20ppts of GDP, to close to 95%, in 2020. Sustainable monetary stimulus would also bode well for a continued recovery in domestic demand. February 7, 2018 At its 7 February meeting, the Central Bank of Brazil’s Monetary Policy Committee (Comité de Politica Monetaria, COPOM) decided to cut the benchmark SELIC interest rate by 25 basis points, a smaller cut than the 50 basis-point reduction it made at the previous meeting. You can decide which cookies to allow and can change your cookie settings at any time. Whereas fiscal policy predominantly operates in a countercyclical direction, monetary policy operates in a pro-cyclical direction. Monetary Policy Versus Fiscal Policy. Monetary and Fiscal History of Brazil Commentsby Andy Neumeyer Universidad Torcuato Di Tella August, 2018. These include concerns about exacerbating financial market instability, notably FX market volatility, which would likely rise even further if the SELIC rate drops below its current level. Monetary Policy Rate for Brazil from International Monetary Fund (IMF) for the International Financial Statistics (IFS) release. On a positive note, fiscal difficulties have also helped spur Congress into action and advance pro-growth initiatives that had been paralyzed until recently. But the fact that the flexibilization or even the elimination of the spending ceiling is being considered should be a major source of concern. Throughout history, Brazil has had a difficult time stabilizing their economy. Learn more about how we use cookies in our cookie statement. 2%, relative to the 10-year historical average of 10%). Brazil’s public sector (nominal) deficit should rise towards 18%-of-GDP while (gross) debt-to-GDP is expected to suffer the largest increase across LATAM majors, rising by about 20ppts of GDP, to close to 95%, in 2020. Overall, we expect the government and Congress to remain committed to the current fiscal framework. But, we suspect, Brazil’s fiscal framework will remain under threat in the coming years, helping to justify a high level of volatility and risk premium for local assets. Brazil's economy goes into next year continuing its rebound from this year's pandemic-fueled slump, but risks losing steam because the window for further fiscal and monetary support is closing fast. The combined effect of the larger spending and the recession-related drop in tax collection should result in a major fiscal deterioration in 2020. Brazil has had a long period of high inflation. Another round of fiscal stimulus would, however, create a vicious cycle. And, as discussed above, stronger activity indicators and the growing investor focus on the rise of inflation risks should be among the factors that would favor interrupting the easing cycle. Without significant pension reform, Brazil will break its constitutional “ golden rule ”, which prohibits increasing federal debt for the sake of financing the government. Both monetary and fiscal policy are macroeconomic tools used to manage or stimulate the economy. Brazil’s forceful policy reaction to the pandemic was crucial to mitigate its economic impact but it requires some correction in 2021. Headwinds abound for 2021, however. Monetary policy can lend a hand. Stronger-than-expected activity indicators and the growing investor focus on inflation and fiscal risks are among the factors that have helped consolidate the view that, even though Brazil’s central bank did not close the door to additional rate cuts, the policy rate should remain stable at 2% in the foreseeable future. This scenario should not be taken for granted, but we believe there’s enough opposition within Congress, regulators, and the press, along with disciplinary market forces, to prevent the creation of a constitutional majority in Congress to change the law. This suggests that fiscal responsibility should not be taken for granted, and that fiscal risks will remain elevated in Brazil in the foreseeable future. Brazil’s economic policy response to the pandemic was unusually aggressive by EM standards. Another important factor that has gained traction lately is the heightened fiscal uncertainties resulting from the sharp deterioration in fiscal accounts expected for 2020. As it stands, the current fiscal framework, centred on the “fiscal spending ceiling” mandate, which has frozen government spending in inflation-adjusted terms, would ensure a gradual improvement in Brazil’s fiscal trajectory. Among the most notable developments over the past month in Brazil we include the strong evidence of a faster-than-expected post-pandemic economic recovery and, on the inflation front, concerns regarding the widening gap between producer and consumer prices and, especially, the fast rise in food prices. Congress also enacted a partial extension of the household income-transfer program until December, while Covid-19 remains an impediment for full normalization. Fiscal Policy According to an article on Rurters.com, "Brazil's government remains committed to fiscal discipline". And 2021 is likely to be a crucial year for Brazil to reveal its commitment, or not, to a sustainable fiscal trajectory. With the household income transfers set to end in December and government spending already set to reach the legal limit stipulated in the “fiscal spending ceiling” in 2021, temptation to change the law to accommodate greater spending has increased, resulting in frequent efforts to weaken the fiscal framework. At its 17–18 September meeting, the Central Bank of Brazil’s Monetary Policy Committee (COPOM) unanimously decided to chop the benchmark SELIC interest rate from 6.00% to a new historical low at 5.50%. Brazil’s economic policy response to the pandemic was unusually aggressive by emerging market standards. An alternative scenario in which Congress abandons the current fiscal framework and opts for fiscal stimulus would, meanwhile, create a vicious cycle. Brazil has experienced one of the highest short-term interest rates worldwide for a long period. This suggests that inflation expectations should remain fully-anchored and the central bank should be able to keep the policy rate unchanged at 2% throughout 2021, providing upside risk to GDP growth expectations. In our view, inflation risks are narrow-based and do not alter our largely benign outlook for inflation in Brazil. This should also contribute to support consumer demand beyond 3Q, and point to a relatively shallower recession in 2020, along with a strongly positive carryover effect into 2021. 2Q GDP data, and preliminary data for 3Q such as the July/August results for retail sales, construction, industrial production and workplace mobility data, point to a very sharp expansion in 3Q that could nearly offset the 2Q drop. Brazil’s monetary policy is run by the Central Bank of Brazil. Brazil’s economic policy response to the pandemic was unusually aggressive by emerging market standards. Anchored and below-target inflation expectations together with the pronounced price indexation and wide output gap (notably in services) also suggests that, despite current concerns over wholesale and food prices, Brazil’s inflation outlook should remain largely benign in the foreseeable future. Stay up to date with all of ING’s latest economic and financial analysis. As it stands, the current fiscal framework, centered on the fiscal spending ceiling, would be enough to ensure that the fiscal deterioration is circumscribed to 2020. Brazil's experience of designing and managing institutions to this end is likely to be of interest to other emerging and low- or middle … As a result, we suspect authorities will focus more on “forward guidance”, as evidenced by the debates initiated in the latest policy meeting, possibly as an effort to flatten the shorter-end of the yield curve and deepen the expansionary impact of the current monetary policy stance. The Project •Interesting project: “macro lab” for small open economies ... •Monetary and Fiscal Policy –Policies and stabilization plans –IMF programs –Institutions Brazil cuts rate 5th time in '20, easing room now small Brazil's central bank lowered its key interest rate for the 5th time this year but said the remaining space for further monetary easing is now small and any further changes to the current degree of stimulus would be gradual and depend on the outlook for fiscal policy and inflation. Frankel, Vegh, and Vuletin (2011) break this pattern and provide evidence that in the last decade some emerging countries have shifted the direction of their fiscal and monetary policies from pro-cyclical to anticyclical. The move was widely expected by market analysts and marked the Bank’s second consecutive cut and a continuation of the easing cycle to help support the economic recovery. The approval of legislative initiatives such as a robust “administrative reform”, which would help curb the rise in public sector wages, along with other fiscal initiatives currently under debate in Congress would help reduce concerns over the eventual flexibilization of the fiscal spending ceiling. I understand that some functions will not be available. As discussed below, uncertainties about the Congressional commitment to fiscal responsibility is unlikely to abate anytime soon, and this is already weighing heavily on local financial assets. Vitor Gaspar, W. Raphael Lam, and Mehdi Raissi. Mr. Marleau, age 76, is a veteran capital markets professional, corporate director, and Chair of the Marleau Lecture Series on Economic and Monetary Policy UPDATE 1-Brazil cenbank to intervene in FX if it sees dysfunction from $15 bln 'overhedge' flow This sharp deterioration suggests that room for additional fiscal relief is exceedingly narrow. The SELIC rate now rests at 6.75%—a record low. 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