Santander raises projections for Brazil’s GDP until 2023 and reduces inflation

Santander raised its forecasts for Brazil’s economic growth this year and next and lowered inflation estimates for both periods, but said the latest scenario revision comes at a time of waiting for future developments in the country’s economic and fiscal policy. country, amid risks to the long-term debt stabilization trajectory.

Brazil’s Gross Domestic Product (GDP) is expected to grow 2.8% this year and 0.7% in 2023, according to Santander’s new forecasts. Before, the bank had expected expansion of 2.6% and contraction of 0.2%, respectively.

For the coming year, “we continue to see a slowdown in domestic demand and cyclical components of supply, reflecting the expected global recession in parallel with a restrictive policy on the part of” the Central Bank, said the chief economist at Santander Brasil, Ana Paula Vescovi, and team in a report dated this Friday (14).

“On the other hand, we now expect a stronger performance from less cyclical sectors linked to commodities (especially the case of the agricultural sector), reflecting expectations of record in the 2022/2023 grain harvest.”

On the inflationary front, Santander expects the IPCA to rise by 5.5% in 2022 and 5.0% in 2023, against rates of 6.3% and 5.3%, respectively, seen in the previous scenario. The official inflation target ceilings are 5.0% for this year and 4.75% for the next.

“The main factors behind the change were: the tax cuts implemented in July were passed on to consumers more intensely than expected; fall in the price of oil and reduction in the price of gasoline; and bearish surprises in the inflation of durable goods”, said Vescovi and team in the document, with inflation for the next year expected to present “lesser inertial effects from 2022”.

The private bank maintained previous forecasts that the Selic rate will end this year at the current level of 13.75%, before retreating to 12.00% by the end of 2023.

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Although it has improved the outlook for the country’s growth and inflation, Santander said in its scenario review that it continues to await future developments for Brazilian economic policy after the end of the electoral period, citing concerns about the trajectory of public debt amid pressures for more spending and changes in fiscal rules.

“We see even greater pressure for a ‘fiscal waiver’ (ie, a legislative authorization to expand spending above the constitutional ceiling) next year”, in part due to the reduction in the projection for the IPCA hike this year, as the Project of 2023 Annual Budget Law (PLOA) estimates higher inflation of 7.2% in 2022.

The spending ceiling, the country’s main fiscal anchor, was relaxed last year under the PEC dos Precatórios to allow for an increase in spending on social benefits.

“Additionally, we continue to see a future worsening in the nominal deficit, due to the increase in the cost of debt (given the higher Selic), implying an even steeper upward trajectory for public debt in the medium term”, evaluated Vescovi and team.

“For the long term… we continue to see a risky path towards debt stabilization, given the reduced effectiveness of fiscal rules and social pressures for further increases in spending.”

Santander said it sees measures such as a tax reform, trade liberalization in Brazil and regulatory improvements as important to increase the potential growth of the economy, and stressed the “need to once again address the fiscal issue”.

Despite the warning, the bank still reduced its estimates for gross debt to 78.2% of GDP this year, 82.8% next year and 88.0% in 2024, against previous forecasts of 79.0%, 83.5 % and 88.9%, respectively.