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Opinion: Will Vice President Temer Really Be the 'Bridge to the Future'?

04/25/2016 - 09h59



If Michel Temer becomes president, his administration will face a terrible fiscal situation. The size the fiscal hole - the distance between the current deficit and the surplus that stabilizes the public debt - is somewhere between R$ 150 billion (US$ 42.8 billion) and R$ 360 billion (US$ 102.8 billion), which means something ranging between 2.5% and 6.0% of the country's G.D.P.

Different estimates for the cyclic component of this year's fiscal debt, in addition to uncertainties regarding the National Treasure's long-term capacity to collect nonrecurring revenues, explain why the estimated figures vary so much.

To make matters worse, the unbalance has grown some R$ 30 billion (US$ 8.5 billion) per year. This hike is passive due to eligibility criteria and the value of the benefits of a series of public transfer programs, as well as the automatic growth of the payrolls to public employees.

Thus, if nothing is done, we will inexorably take the road to insolvency in the public sector, and, therefore, to growing inflation. This is the structural situation.

However, Temer will take office at a favorable moment of the economic cycle. By the end of last year, two opposing forces drove the dynamics of inflation: the very strong recession with increasing unemployment was pulling inflation down, while the plunging trust due to the rise of Brazil's country risk and the unappreciated currency, was pulling it up.

As the American currency lost value around the world and the highly optimistic perspective of a change in the country's administration have produced favorable currency exchange rate dynamics for inflation since the beginning of the year.

The change in currency exchange rate dynamics is a relief for the inflation of goods and, as it is associated to the labor market's dynamics, it will finally produce a consistent declining inflation of services. Thus, the inflation rate could reach some 7% by the end of the year and meet the 2018 goal.

The declining inflation rate is a sign that a new cycle in the country's benchmark interest rate (Selic) is just in front of us, and that could lead to the end of the disinflationary adjustment, with the recovery of growth promoted by the fall in the benchmark interest rate. It is not crazy to forecast the country's economy growing vigorously in 2018.

The necessary premise to reach this benign scenario - especially in the light of the huge storm we are going through right now - is for the market to thoroughly agree to finance Brazil's National Treasure, despite the country's public debt continuing its explosive path and testing limits such as 80% of the G.D.P. or even higher than that.

That means that the plan must be followed by all sides. And that is the reason why I believe that the most likely scenario is that the Temer administration will reproduce the Levy period: as the market realizes that there aren't enough resources to approve the measures in the National Congress that will pave the way to solving our very serious structural fiscal imbalance, Brazil's country risk and the currency exchange rate will be under pressure again and the good expectations regarding inflation will cease. The cyclic adjustment will lose efficiency once again.

However, it is possible to imagine a favorable scenario: Temer may manage to have some measures approved which could contribute to adjust the structural unbalance.

These measures could lead to renewed optimism and hope, maintaining Brazil's country risk and the currency exchange rate positive. As we have seen, the cyclic dynamics which are favorable today help the recovery of activity with falling inflation.

If all of this does in fact occur, at some point in the second half of 2017, the forecast for 2018 will take pressure off the Temer administration and the perspective for the future will begin to lead expectations. In that case, the Temer administration will have been a bridge to the future.

Translated by THOMAS MUELLO

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