- Ahead of a possible fiscal package announcement by a budget committee on Friday, JP Morgan notes that the government is considering strategies to reduce spending pressures by as much as BRL30bn in 2025 and BRL40bn in 2026. Composition will matter, but at first glance JPM sees such estimates as positive, as they would marginally reduce rigidity and give the administration more space to manage budget execution.
- The fact that the announcement is taking longer than expected and may even only become material by late November reinforces JPM’s view that it will not be approved until the end of the year. This lack of clarity has and will likely continue to weigh on economic expectations and asset prices, as the market remains uncertain about the government’s fiscal strategy for the second half of President Lula’s term.
- All considered, JPM continues to expect that the BCB will raise rates to 13%, a cycle that will last until May 2025. However, the asymmetric view on inflation, the robust economy, weak BRL and lack of clarity regarding fiscal adjustments keep risks skewed towards an accelerated pace of tightening and a potential extension of the cycle.
BRAZIL: JP Morgan Sees Fiscal Uncertainty Continuing To Weigh On Asset Prices
Last updated at:Nov-21 18:46By: Keith Gyles
Brazil
- Ahead of a possible fiscal package announcement by a budget committee on Friday, JP Morgan notes that the government is considering strategies to reduce spending pressures by as much as BRL30bn in 2025 and BRL40bn in 2026. Composition will matter, but at first glance JPM sees such estimates as positive, as they would marginally reduce rigidity and give the administration more space to manage budget execution.
- The fact that the announcement is taking longer than expected and may even only become material by late November reinforces JPM’s view that it will not be approved until the end of the year. This lack of clarity has and will likely continue to weigh on economic expectations and asset prices, as the market remains uncertain about the government’s fiscal strategy for the second half of President Lula’s term.
- All considered, JPM continues to expect that the BCB will raise rates to 13%, a cycle that will last until May 2025. However, the asymmetric view on inflation, the robust economy, weak BRL and lack of clarity regarding fiscal adjustments keep risks skewed towards an accelerated pace of tightening and a potential extension of the cycle.
