While part of the Brazilian market tries to create a positive environment for a theoretical entry of China as a major buyer of Brazilian corn, exports are evolving at a surprising speed toward real destinations. The Brazilian summer crop of corn is progressing well, despite some more problematic points where La Nina should not be interfering, such as Goiás and Mato Grosso. At the same time, markets are still very volatile abroad with the environment of expectations after the Fed’s minutes and with the difficult institutional political environment in Brazil. Brazil’s credit risk raises concern over the exchange rate in the face of potential irresponsible management of public spending and when it is suggested that the Federal Court may be used to approve a budget increase without a source of revenue. By the way, the sources of revenue for Brazilian states have begun to be the focus of the new governors, now with the approval of the new taxation by Goiás. The country that least subsidizes agribusiness may have the world’s highest tax burden in the sector.
The Brazilian economy will close 2022 with excellent numbers in the face of the world scenario and the post-pandemic inflationary cycle. The trajectory for Brazil would be one of continuity of this good development in a safe and optimistic environment for the management of public accounts and economic organization. As a result of a change in government, the transition management team has been oriented toward an economic policy that is unattractive to the good development of the Brazilian economy.
The basic principle that led Brazil to leave the hyperinflation of 50% per month and reach the Real Plan was the control of public accounts, that is, by generating expenses from income creation. Even with this principle, Brazil started from an initial exchange rate of the Real Plan of almost BRL 1 per dollar, while today the rate is BRL 5.40/dollar. This reflects the increase in the monetary base and the inflationary process, even if smaller, in the history of the real. If we have a bias toward resuming the trajectory of public spending to the point of requiring greater issuance of currency, given the rise in the ratio between domestic debt and GDP, we will simply be returning to the pre-Real Plan era. It seems simple to understand and compare this model to the Argentine one, with hyperinflation, without dollar reserves, dependent on international loans, highly taxed even in agribusiness.
This endorses an economic policy that detaches itself from the external environment or tries and practices its government spending regardless of events, generating hyperinflation and stagnation. It seems that the “Argentinization” of the Brazilian economy is what is intended with the irresponsibility of public spending, breaking the ceiling, unconcern with the debt/GDP ratio and with the proportion of interest rates that will be necessary for banks to manage the public debt. It is at this point that the financial market seems to have perceived the erratic trajectory of this Brazilian political transition, among other indicators.
The picture reminds us of a marked tendency of state and federal governments to create revenues. Agribusiness is already beginning to be affected by governments that have suggested being in favor of agribusiness. Goiás imposed a 1.65% tax on local agribusiness following the example given by Mato Grosso. States such as Paraná and Tocantins threaten to follow the same direction. With the desire to spend and not cut expenses, the environment for agribusiness is starting to look delicate ahead. At federal level, the attempt to overturn the Kandir Law in 2023 must be constant, as this imposes the resumption of export taxation, state and federal taxes, including 12% of ICMS, a factor that could alter the costs of all production supply chains and discourage planting.
The real is still comfortably trying to fit to an optimistic view of this whole process, not least because the current national accounts are very good and the country has an excellent reserve of dollars. The test of the dollar at BRL 5.50, however, may arise at any time if the government’s economic plan continues the same, that is, if public accounts are not respected.
On the other hand, the external environment seems to settle down a little after the minutes of the Fed. The confirmation of the last 0.5% rate hike of 2022 for December and an alignment of minor corrections for 2023 eased some tensions in the markets. Of course, inflationary symptoms will continue to be the big factor for markets in 2023.
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