The fiscal dilemma for 2021
The outlook for Brazil's government accounts in 2021 remains largely uncertain. There are doubts about the compliance with the spending cap, both because of the ambiguous signs from the government and of the difficulty of respecting the mechanism in a year in which federal non-financial expenditures may grow only 2.1%. Moreover, there is much uncertainty about the capacity and willingness of the Jair Bolsonaro administration of promoting reforms that tackle the growth of mandatory expenditures and increase the country's potential growth, such as the administrative and tax reforms.
This confusing and uncertain picture has been contributing to currency devaluation and rise of interest futures, affecting prospects for inflation and for the pace of economic recovery. Benchmark Selic interest rate at 2%, the biggest trump card for the recovery and to provide some relief to public accounts, are under threat. The biggest risk is Brazil having in 2021 another year of mediocre growth, which would be terrible after the country went through the big recession that lasted from the second quarter of 2014 to the fourth quarter of 2016, through the GDP expansion slightly above 1% per year in 2017, 2018 and 2019 and by the slump of 2020, because of the pandemic.
This year, the Brazilian economy will shrink sharply, probably about 5%, but the GDP contraction was attenuated in special by the big fiscal measures that the government adopted, in addition to the firm Central Bank action on the monetary front. J.P. Morgan highlights that Brazil's fiscal response to the covid-19 impact was one of the strongest among emerging nations, calculated at 8.6% of GDP, including emergency transfers and measures of tax relief.
This produced a big fiscal impulse for the economy. J.P. Morgan estimates it to stand at 9.2% of GDP in 2020, considering the change of the primary result (excluding spending on interest) adjusted by the economic cycle, according to a report signed by economists Cassiana Fernandez, Cristiano Souza, Ben Ramsey and Gabriel Lozano. In the study, they compare the actions of the Brazil and Mexico governments in the pandemic and the prospects for the two economies. To compare, the fiscal impulse in Mexico will be only 0.5% of GDP this year. The GDP there is expected to contract 8.9% in 2020, largely because of the absence of stronger fiscal measures, in J.P. Morgan's view. For Brazil, the bank estimates GDP decline of 4.9% this year.
Brazil entered the...
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