Election year puts pressure on Brazil's economic risk, says Arko Advice

The combination of bomb agendas and increased spending aimed at elections will increase pressure on public accounts and weaken fiscal rules. This is the analysis of the Risco Brasil report, launched this month by political consultancy Arko Advice, WW's content partner.

Among the measures currently being processed at a cost of billions is the increase in Simples Nacional. Just increasing the limit for small businesses would cost the public coffers more than R$40 billion, according to calculations by the economic team. Planalto opposes the proposal.

On the other hand, the Lula government, until May this year, had launched initiatives that could inject around R$227 billion into the economy in 2026, according to a CNN Money survey.

Political scientist and CEO of Arko Advice, Murillo de Aragão, pointed out to WW that public accounts are a risk factor for the country's economic environment. "Because with this insecurity regarding the tax issue, the businessman retracts his instinct as an investor and prefers to wait and see what will happen", he highlights.

According to him, there is little room for debates on tax reforms in the current political context. "What's happening is a dispute over populism... The government 'prepared populism' and Congress says: 'I'm also going to be populist and I'm going to approve bomb agendas here", he points out.

Analysis: Study by Arko Advice assesses the level of institutional risk in Brazil | WW

In the report, the consultancy sees a possible loss of credibility as likely, with the timely approval of matters harmful to the budget. Along with this would come the partial overturn of presidential vetoes involving increases in expenses.

The result would be "fiscal noise" and a gradual deterioration of the budget, with a smaller drop in interest rates.

Aragão warns that budget deterioration, along with other political factors, could directly affect campaigns for the presidency. "I see a worsening of the situation and, when this institutional and fiscal scenario hits economic activity, it will generate greater unpopularity for the government", he stated.

However, Arko also offers the possibility of cost containment. In this case, Congress would limit the advancement of bomb agendas and preserve parts of President Lula's vetoes on spending proposals.

The result would be "scratched" but still present fiscal rules, a gradual cycle of interest rate cuts by the Central Bank and a predictable economic environment.

Analysis: US geopolitical pressure is greater than Lula and Flávio Bolsonaro | WW

* published by Danilo Cruz, from CNN Brasil in São Paulo

Source: CNN