Porto Alegre, March 6, 2023 – While the Brazilian market tries all alternatives to contain any bullish movement, Argentina is coping with new cuts in corn and soybean production. After the frosts at the end of February and the sequence of high temperatures and little rain in early March, the market now predicts a situation change from difficult to agricultural calamity. This condition of the Argentine crop will not cause a shortage in the country but tends to accentuate a greater demand for other corn exporters, such as Brazil and the United States. Premiums have risen again in the external environment, and now part of this demand is expected to shift to the United States in the first half of the year. In addition, an unprecedented delay in the soybean harvest in Paraguay is leading to the abandonment of corn planting in the center-south of the country. This still does not happen in Brazil, however, as we have pointed out, around 50% of the area will be planted in March, putting a larger portion of crops at risk from the weather. For now, the forecast for the fall is of regular weather and lower risk for the corn second crop. Week with USDA report, in which the focus will be the cuts in the Argentine crop.
Inflation is still high in the United States and Europe. Data of falling demand in the US durable goods industry, with property sales remaining 24% below the same period in 2022. On the one hand, data on economic slowdown, and on the other, still high inflation. In the midst of this information, employment is still high, fueling prices. This set of data has suggested to the market that the central bank will need to impose more effort on its monetary policy to converge inflation to the 2% target in 2023.
Next week, the US inflation for February must be released, on the 14th, which must guide the Fed’s decision on interest rates on the 22nd. It is already quite evident that the interest rate will rise by 0.25% at this meeting given the already known information from the beginning of the year. But February inflation could determine whether there will be an 0.25 or 0.5% high. Higher interest rates imply further shrinkage of local and global liquidity, with consequent upward movements for the dollar and devaluation of emerging currencies. The only point that can ease the curve is really a sharp decline in inflation in February, which does not seem clear as core inflationary prices are not giving way.
The Chinese currency, which was one of the most appreciated this year, lost value again, now reaching nearly 7 per dollar. This is a consequence of the increase in the Dollar Index on the NYSE, which reached levels above 105 points last week, showing a strong appreciation of the dollar against other currencies.
For Brazil, the exchange rate is still operating with an eye on the global scenario, pleasing part of the internal market and ignoring the economic policy bias offered by the new government. On the one hand, the rise in the dollar abroad sustains the real even above BRL 5.00 because we have equalized interest rates abroad, and this is enough to maintain the attraction of foreign capital and avoid a capital flight. That is, the monetary policy is equalized in interest rates to keep the exchange rate stabilized in the range of BRL 5.00/5.50/dollar. As we still have attractive rates, the inflow of capital into the country is going to be positive. Via trade, we have the same balance flow in comparison to 2022, that is, nearly USD 5.5 bln in the first two months of the year.
However, the attacks on the Central Bank continue and the attempt to dominate monetary policy is clear by the new government. The Central Bank can remain independent as long as it has government agents in charge of monetary policy. And from what we saw last week in the Petrobrás episode, the focus is on following the line of Argentinization of Brazilian economic policy by adopting internal measures regardless of the global scenario. Taxing oil exports has its impacts on the costs of the entire domestic economy and will have on fuel prices, possibly even causing supply shortages. Changing the policy of a company like Petrobrás, which could not be touched by any reason in the previous administration, is certainly a sign that all sectors will suffer interference by the statist policy.
All these decisions will have their effect in the future and are not favorable to the country. However, they are being adopted even with the support of segments of the economy and the financial market. It is clear that the greater the State’s indebtedness, the greater the spin of this debt in the financial system. The traditional Brazilian inflationary circle. If the Central Bank is led to reducing interest rates in a way that is not in line with the rest of the world, there will undoubtedly be a rush to the dollar and capital flight. The rise of the dollar in this economic policy environment is fully inflationary. We are creating an economic “bomb” that will explode at some point in the future, and the result will be more inflation.
The Tax Reform may be voted on in May. There seems to be no doubt, given the profile of government spending, that the reform could come with a higher tax burden, including the overturning of the Kandir Law, which exempts grain exports from taxation. Oil export taxation is a sign that agribusiness could be the next target.
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