The delay in the payment of precatórios has been seen with mistrust by the financial market, as it opens a fraught legal precedent of discounting expenses from the spending cap. However, the non-approval of the measure presents additional risks because it may serve as a justification for increasing expenses without counterparts, voiding the rule of Fiscal Responsibility. Ultimately, the lower commitment to Brazil’s fiscal anchors will likely perpetuate FX volatility and decrease the currency’s ability to appreciate throughout 2022. Along with developing scenario planning to account for significant chances of FX depreciation, MNCs should also consider reviewing the frequency of their pricing cycles.
Throughout October, Brazil’s Chamber of Deputies approved the base text of the constitutional amendment known as “Precatórios PEC,” which allows for the prorated repayment of court-mandated debt known as precatórios and modifies Brazil’s spending cap, the country’s main fiscal anchor. The approval would make more than BRL 100 billion available in the 2022 budget under the spending cap; BRL 44.6 billion would come from the deferral of precatório payments, and 47.0 billion from the recalculation of the spending cap limits, which would use year-end inflation instead of mid-year figures. If passed in the Senate, the additional fiscal space is already spoken for—minimum wage expenses will demand BRL 27 billion more than initially budgeted due to higher inflation, and BRL 50 billion will be directed to the expansion of the Bolsa Familia program. Once the government confirmed its intention to modify the spending ceiling to extend the social benefit, the country’s main fiscal risk indicators (such as the stock market, the dollar, and future interest rates) worsened significantly.
The bill now awaits approval in the Senate, where it is bound to encounter significant opposition and undergo additional changes before a likely approval. In our view, various domestic and international factors will prevent the real from appreciating next year. Domestically, the mounting fiscal risks stemming from heightened uncertainties on the spending cap front and the lack of progress regarding the tax reform agenda will continue to cap any BRL upside. Additionally, we still expect that elections next year could bring additional volatility, reflecting the uncertainties regarding the government debt trajectory. Therefore, we continue to anticipate a new round of BRL weakening as the electoral process proceeds. Globally, persisting inflationary pressures worldwide will likely mean less monetary policy stimulus in key advanced economies. As a result, we have revised our FX forecast for 2022 from 5.28 to 5.5.
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