Ceron: Subsidies will end if oil stabilizes close to US$80

Brazil will end subsidy measures on fuel prices, including diesel and gasoline, if the price of oil settles at around US$80 per barrel in the wake of an agreement signed by the United States with Iran to end the conflict in the Middle East, said the executive secretary of the Ministry of Finance, Rogério Ceron.

In an interview with Reuters on Tuesday afternoon (16), Ceron stated that an end to the war also tends to improve market projections for inflation and remove pressure on future interest rates, opening space for the Central Bank to further ease monetary policy, in addition to reducing public debt costs.

The secretary said that the next 30 days will be of observation regarding the consolidation of this scenario, pointing out the need for caution in the face of a war that triggered volatile reactions not only in the price of oil, but in variables such as interest rates and exchange rates.

"If it stabilizes (around US$80 a barrel), there is really no need to continue the measures. We will withdraw out of prudence, for sure," he said.

Since the outbreak of the war promoted by the United States and Israel against Iran, at the end of February, the government has announced a series of emergency measures to cushion the effects of the rise in international oil prices, with tax reductions or subsidies on diesel, gasoline, aviation kerosene and cooking gas.

In general, the measures were issued for two months, and some of them have already been extended. Most of the initiatives are valid until July, a period that Ceron said is sufficient to assess the effects of the expected end of the war.

"There are two scenarios: trying to bring forward the end of the measures or letting them expire within their expiration dates", he said.

The secretary highlighted that although the level of US$80 per barrel represents an increase compared to Brent oil prices of US$70 seen at the beginning of the year, the Brazilian currency has appreciated since then, with the dollar rising from R$5.20 to around R$5.00, helping to offset part of the inflationary pressure with the more expensive energy input.

Brent crude futures fell 5.1% on Tuesday to close at $78.96 a barrel as details emerged of a tentative agreement to end the war and reopen the Strait of Hormuz.

Stimulus measures
After economists had significantly reduced their calculations on the size of the interest rate cut by the BC this year in view of the more challenging situation for inflation, Ceron stated that the projections for the IPCA were fundamentally affected by the war in Iran, refuting that the stimulus measures implemented by the government of President Luiz Inácio Lula da Silva were decisive in this regard.

"If you exclude the impact of the war, you don't have a scenario of relevant inflationary stress," he said.

With the expected accommodation of oil, the expectation is for a quick reversal of market projections for inflation that had moved away from the 3% target, including for longer horizons, which will allow "monetary policy to have a little more degree of freedom", he added, on the eve of the BC's new monetary policy decision.

Since the beginning of the month, banks have been estimating the joint impact of the new stimulus measures announced by the government amid Lula's strategy towards re-election in October.

By Lucinda Pinto: Drop in oil prices authorizes bet on interest rate cuts | MONEY NEWS

Projections point to a boost of more than R$200 billion this year, mostly via subsidies, guarantees and contributions outside the primary result, but with an effect of putting pressure on the already high and growing public debt.

"If it were true that there was a stimulus of 2% of GDP... This would put economic activity close to (an increase of) 3%", he said.

"There is no type of stimulus of this magnitude", he added, without specifying a number, but highlighting that recent economic indicators, such as retail sales, have shown a "significant slowdown" in activity.

The Treasury projects GDP growth of 2.3% this year, within a range of 2.0% to 2.5% that Ceron defended not to impose inflationary pressures.

The market has been revising its accounts upward for a month, now estimating an increase of 1.96%, according to the BC's most recent Focus bulletin.

According to Ceron, the debate led by the market has placed different measures in the same package, mixing fiscally neutral actions, such as the expansion of income tax exemption, with others that stimulate activity, albeit marginally, and without necessarily putting pressure on inflation.

He cited as an example the subsidized credit lines for purchasing trucks and for app drivers and delivery people to purchase vehicles, highlighting that, in these cases, automakers have committed to offering discounts.

"So, in fact, the effect for this sector is deflationary, not inflationary," he said.

Fiscal
Ceron acknowledged the country's challenges in the fiscal area, arguing that it is necessary to promote a debate on the growth trajectory of mandatory execution expenses, but stated that there is no scope for proposing measures on the eve of an electoral campaign.

The secretary considered that, in the government's view, the high level of interest rates in Brazil, which puts pressure on public debt, cannot be attributed exclusively to the fiscal framework, with other more relevant factors, such as the low level of savings in the country.

"I'm not denying the importance, we have to move forward with fiscal matters, but it's not the only issue", he said.

In relation to the recent stress on the Brazilian interest curve, which saw an increase in yields paid in different terms, Ceron highlighted that there was a preponderant impact of indicators showing resilience in the US economy, which triggered repricing around the world.

If the peace scenario in the Middle East is maintained, the tendency is for the curve in the American market to close, with Brazil also behind this movement, he stated.

"Our spread in relation to the American market is not far from our history, on the contrary", he said.

The secretary also stated that he sees pessimism in the local market in relation to Brazil, while in the international market the country is evaluated in comparison with its peers and in a more calm and passionless way.

"The international financial market is the most robust for efficient price formation in the world, nothing compares to it. Brazil has been priced for a long time, for almost three years now, at investment grade, with a reduced spread, with extreme appetite in relation to its peers", he said.

He also stated that the country should carry out a new sovereign issuance of sustainable bonds in the second half of the year, and highlighted, without giving details, the approach of new announcements during the visit of the Minister of Finance, Dario Durigan, to China this month.

Reuters showed that the minister is expected to announce on the trip that Brazil will issue its first sovereign bonds in yuan, known as "panda bonds".

Source: CNN