Review of indicators saves assets, but taxation of dividends weighs heavily

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The rule is historical and clear. Unexpected and surprising information guides a legion of operators of the financial market to command asset buy and sell orders in the heat of the moment. The repercussions on prices and fees are clear and certain. Yesterday, however, the script changed and another crowd was hurriedly mobilized: the economists.

O Gross Domestic Product (GDP) lower than expected in the second quarter, plus a strong increase in the electricity bill and the sending, by the government to the Congress, of the proposal of Budget for 2022 subject to much discussion and review did not write off financial assets, but precipitated the block review of growth projections, inflation e Selic. All for the worse. To this data was added, this morning, the result of the industrial production July, weaker than expected. The market has already resumed the ‘historic rule’ and assets suffer with the approval, in the Chamber, of the income tax reform, which includes the dividend taxation and the end of interest on equity.

The new projections of economic indicators, if not disturbing yet, do not help either. GDP since year was closer to 5% than 6%; next year, closer to 1.5% practically spiked. THE Inflation expected for this year will exceed 8%; for 2022 it is around 5% – ceiling of the tolerance interval of the target regime in force in the country for next year. The Selic rate, up since March and today at 5.25%, sticks at 8.5% and there it should remain until December 2022 – the highest level since September 2017. It is not little, but this estimate is subject, however, to new readings due to inflation. In practice, the market will pursue a more comfortable margin of real interest – the one that exceeds the variation in prices in the economy.

David Cup, head of economics and strategy at the Bank of America no Brasil, gives a good measure of the nebulous outlook for activity in the coming months. He considers his projection for the GDP of 2021 of 5.2% and 2.1% for 2022 to be appropriate, but informs that the BofA Coincident Tracker and some confidence indicators already show some accommodation in the third quarter. There’s a reason for that: end of emergency aid in July, increase of political noise, breaks on the side of offer that drive input prices, and low levels of reservoirs of water.

For José Francisco de Lima Gonçalves, chief economist of Factor Bank, the fall in GDP between the first two quarters of the year shows that we are back in the past. “To a less than brilliant past”, he reinforces in a report. “Since the 2015/2016 recession, the economy has grown at 0.3% per quarter, 0.9% per year, on average. The outlook, on the demand side, without which there is no supply, is one of contraction. continuous nad June showed a drop in the mass of real income and in the average real income, despite the rise in occupation. Interest rates are expected to stay high for several quarters, as well as inflation, which will be aggravated by the cost of electricity and for some high service prices. The two main components of domestic demand, at a time of restraint in government spending, clearly show that the current situation and the expectations of companies and families are disheartening”, he says.

Budget ready for adjustment

A Budget proposal, points out the senior economist of J.P. Morgan, Cristiano Souza, will need adjustments, increasing fiscal uncertainties and the discussion of the proposal sent to Congress on Tuesday by the government. The proposal foresees a deficit of BRL 49.6 million, being the strong increase in revenue the main driver for the reduction of a deficit of BRL 155.1 billion presented in the last bimonthly review of revenues and expenses. Souza recalls that the text forwarded foresees that total revenues will reach 20.8% of GDP and net revenues, 17% of GDP.

O government did not include revenues from the potential privatization of Eletrobras in the proposal, warns the JP economist who makes an important consideration. “Although GDP is expected to grow 2.5% in real terms, the estimate implicit in the government’s Budget proposal brings a deflator do PIB 6.1%, still high considering that the IPCA inflation target for next year is 3.5%. For comparison purposes, if we used a GDP deflator more in line with the inflation projected by the IPCA, the primary deficit would be around R$87 billion; and if GDP grew by 2% instead of 2.5%, the deficit would be R$94 billion”, he says.

By assuming the payment of court orders (R$ 89.1 billion) in a limited fiscal space, says Souza, attention is turned to expenses. He remembers that the spending limit was respected, but imposes the need for an overhaul. considering the non-existence [por ora] of a formal solution to reduce the precatory bill, discretionary expenses in 2022 continued to be severely limited at R$98.6 billion, with investments of R$11.2 billion, less than the R$12.6 billion in 2021 , and the public servants’ payroll frozen in an election year.

O The freeze also applies to the new Auxílio Brasil cash transfer program which was included in the Budget, but with the same R$34.7 billion this year. This amount would be enough to serve 14.7 million families, while the government recently estimated an increase of between R$26 billion and R$28 billion to serve 17 million families. The electoral fund should receive less than half of the R$5.3 billion approved in the Congress.

Strengthens the perspective of reviewing the budget proposal, the outdated parameters that were used for its elaboration. The JP Morgan expert cites that inflation measured by INPC for 2021 is estimated, in the text, at 6.2%, while the JP predicts 8%. That lag leads to an upward revision in mandatory social spending likely further compressing discretionary spending. As a result, says JP Morgan, we expect uncertainty about fiscal policy and budget until the December 22 deadline, when the proposal is expected to be approved.

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