With two months to go until the presidential election, and with no discussion so far about the need for fiscal rebalancing, the financial market has raised concerns about the size of the public debt hole.
In a monthly letter distributed to investors, Adam Capital, owned by Márcio Appel, made clear the need for a significant fiscal commitment in the coming years. In the document, the asset manager shows that the real interest rates currently being charged have reached a level incompatible with the need to maintain healthy public finances.
And he was direct in his prediction: if current public spending conditions continue and a more austere policy is lacking, the public debt could double in size by 2032. In other words, a fiscal time bomb ready to explode within the next one and a half terms of the President of the Republic.
"It is concerning that the real interest rates charged on NTN-Bs [National Treasury Notes] are already above 8%, a clearly unsustainable level. At this rate, public debt could double in just six years," the document says.
Public debt reached R$ 10.8 trillion in June of this year, equivalent to 82% of the Gross Domestic Product (GDP), according to data from the Central Bank.
According to the manager, the deterioration in the fiscal situation has been accelerating. The need for a primary surplus precisely to stabilize the debt has risen to around 4% of GDP, while the harsher reality points to a deficit above 1% of GDP.
"This gap between the observed primary deficit and the deficit required to converge the debt has never been so high. The nominal deficit has already reached 2015 levels, hitting 10% of GDP, even with the index growing for the 6th consecutive year," says the text from the team led by Appel.
The problem is that, in Adam's view, with the exchange rate relatively balanced, there are no incentives, especially for the political class, for the necessary reforms to actually move forward.
In any case, according to the manager, this exchange rate, currently on a favorable trajectory, occurs precisely at the cost of an unsustainable level of interest rates from the perspective of public debt. Since the exchange rate is one of the biggest "showcases" observed by the political class, there is no environment conducive to making changes.
"We are therefore faced with a situation where the facade of the house is beautiful, but the interior is quite deteriorated, and this combination prevents the outside observer from seeing the need for renovations to keep the house's structure standing," he says.
Therefore, the manager says it is natural, from this perspective, that the signals coming from Brasília are moving in the opposite direction of the reforms, and towards more populist themes, according to Adam, such as reducing working hours and ending the 6x1 work schedule .
"None of these proposals meet the requirements for long-term inflation convergence," he states.
Adam also stated that the slowdown in the IPCA (Brazilian consumer price index) in the middle of the year (0.06% in July) is, in practice, circumstantial and temporary, resulting from favorable seasonality and government intervention in fuel prices.
"Our long-term scenario continues to be one of accelerating inflation. We do not foresee a sharp increase in the unemployment rate that could reverse this upward trend in service inflation, which remains around 6%," the text says.
Adam Capital's assessment is not the only one among asset managers that has raised concerns about the direction of public debt and the need for fiscal adjustment.
In June, NeoFeed revealed that Luis Stuhlberger, founder and CEO of Verde Asset, believed that most presidential candidates would engage in "electoral fraud" during the campaign, without addressing the need to rebalance public finances.
"No one will talk about fiscal adjustment during the campaign, and that would be electoral fraud. The only 'brutally honest' candidate who will say this clearly is Renan Santos," he said at the time.
