May 31, 2023

The financial framework may satisfy Faria Lima more than Lula (and that’s the problem) – Money Times

Good or bad, at least the financial framework is now in place and we know the rules of the game we are going to play (Photo: REUTERS/Adriano Machado)

For the financial market, the main use of the financial framework should be used to make accounts. Analysts and managers use government rules to gain some clarity about what the economy will be like in the future and thus invest with minimal ability to predict macroeconomic conditions.

In our months without any financial rules, the feeling was that Faria Lima had done nothing in Brazil, except wait – after all, you can’t sail without seeing.

Last month, the new government finally presented its base and the “data heads” were able to fill in their models, forecast inflation and interest rates, and see at least a little bit into the future. Good or bad, at least the framework is in place now that we know the rules of the game we’re going to play. And so the market started walking. The problem is that we are in Brazil.

Expenditure ceiling and the future of the financial framework

I don’t know if you remember, but we have a really strong fiscal base here, which has worked out very well – so much so that it allowed the central bank to lower interest rates to 2% per year. The so-called spending cap, which was demolished in the middle of the election year, was despite it being a provision of the constitution and the Minister of Economy being a liberal, at least until then.

So, enforcing public spending rules is great, but governments here do it so reluctantly that it’s best not to trust too much. See what I said yesterday…