Conflict of interests: interest versus growth



High interest rates make financial leverage difficult and, ultimately, the debtor pays

Well-informed citizens, in order to follow the public debate at the beginning of Lula's third government, need some knowledge of public finance. Aprioristically, they accuse him of fiscal irresponsibility and encourage high interest rates for defending active social policies and a program for economic growth!

See, in the table below, the Fiscal Table received. In 2022, the nominal government deficit – also called Public Sector Borrowing Needs (NFSP), mirrors government demand on the financial market –, including interest expenses, totaled R$ 460,4 billion, equivalent to 4,7 .383,7% GDP. It rose from BRL 4,3 billion in the previous year (1,015% of GDP), but was much lower than the year of social distancing: BRL 13,3 trillion or XNUMX% of GDP.

In the last two years, there was a small primary surplus (negative component). Tax revenues have outpaced government spending in the wake of the pandemic.

The elasticities of the Net Public Sector Debt (DLSP) – with international reserves discounted in relation to the Gross General Government Debt (DBGG) – and from this to variations in the exchange rate, interest rate and price indices reveal their impacts . The 1% depreciation in the national currency decreases -R$ 6,9 billion in the DLSP (-0,07 percentage points of GDP) and increases by R$ 9,6 billion in the DBGG (+0,10 pp of GDP).

These are minor impacts, if compared to the 1 percentage point increase in price indices, respectively, R$ 17,2 billion (0,18 pp GDP) and R$ 17,1 billion (0,17 pp GDP). With the increase of 1 percentage point in the Selic interest rate, the impacts doubled: R$ 38,0 billion (0,39 pp GDP) on the DLSP and R$ 35,8 billion (0,36 pp GDP) on the DBGG.

Spending on public debt interest increased and reached the highest level in relation to GDP since 2017. Nominal interest in the consolidated public sector reached BRL 586,4 billion (5,96% of GDP), against BRL 448,4 billion (5,04% of GDP) in 2021.

The head of the Statistics Department of the Central Bank of Brazil, Fernando Alberto Rocha, of whom I am proud, a former academic advisor, reported: the increase in the nominal debt stock and the hike in the basic rate (Selic) last year were predominant in the account of interest. In the period, the accumulated basic rate increased from 4,42% in 2021 to 12,39% in 2022.

The fall in the variation of the IPCA [National Consumer Price Index] implies a reduction in interest on the portion of the debt indexed to the price index. Therefore, the reduction in inflation from 10,06% in 2021 to 5,78% in 2022 helped to hold back the impact of the increase in interest expenses last year.

In addition, there was an exchange rate appreciation of 6,5%. This generated gains for the Central Bank with swaps of R$ 92,3 billion and had a low effect on the cost of debt. The country is a creditor in dollars and the volume of international reserves is greater than the debt. Thus, exchange rate appreciation (decrease in the dollar exchange rate) leads to an increase in net debt.

International reserves totaled US$ 324,7 billion in December 2022. Last year, international reserves decreased by US$ 37,5 billion. Even in this, the far-right populist government was a setback, as it received them at US$ 375 billion!

The Gross Debt of the General Government (DBGG) reached the lowest percentage of GDP since July 2017. The level of indebtedness fell, in December 2022, to 73,5% (R$ 7,225 trillion). Last year as a whole, the reduction was 4,8 percentage points of GDP. Considering the end of the year, the annual level is the lowest since 2016, when it ended at 69,8% of GDP, before entering a growth trajectory.

The annual variation in this gross debt can be explained, above all, by the growth in nominal GDP from R$8,9 trillion to R$9,8 trillion, considering both real product growth and inflationary evolution. Due to the increase in tax collection and the ratio with gross debt, it reduced by 7,5 percentage points of GDP.

In addition, net redemptions of public debt securities had a downward impact of 4,5 points. In the opposite direction, incorporation of nominal interest added 7,5 points to the total.

Net debt (DLSP), as stated, discounts government assets such as reserves. It rose to 57,5% of GDP in December. In the year, the increase was 1,7 points. The amount ended 2022 at BRL 5,658 trillion.

In the year, the rise was mainly influenced by (i) nominal interest appropriated (pulled the percentage up six points), (ii) variation in the parity of the basket of currencies comprising the net external debt (contributing +1,4 points), (iii) effect of the 6,5% appreciation of the real in the year (one point increase). When the dollar rate declines, the net debt grows due to the effect of international reserves losing value in local currency (Reais). In the opposite direction, the debt reduced: (a) nominal GDP growth, by 5,3 points, and (b) the primary surplus, by 1,3 points. It is clear, in a Manichean way, that interest is evil, growth is good!

The table below provides a historical overview of the influence of the evolution of the Selic rate on the estimate of the average cost of the DBGG. In a “baker's account”, adding the financial charges from 2007 to 2022, in these sixteen years, BRL 5,672 trillion was spent on nominal interest or, roughly speaking, more than one trillion dollars! How much is it worth? Consider the Brazilian GDP having reached US$ 1,6 trillion in 2021 and that value being practically the same as the DLSP, since it reached R$ 5,658 trillion in 2022.

After a period of downward trend in interest rates from 2017 to 2020, as of March 2021, given the rise in the dollar exchange rate and the inflation imported by supply breaks in the global production and commercial chains, the Central Bank of Brazil used its only weapon (selic rate increase to control aggregate demand) in an unbridled manner. It reached an interest rate equivalent to 1% per month (13,75% pa), in August 2022, the inflation rate dropped to 5,8% at the end of the year, and he, pressured by O Mercado (“Faria Lima ”) and guided by neoliberal economic journalism, refuses to lower it!

Who benefits from rising interest rates? At first sight, it would be the base of DPMFi holders (Internal Federal Public Debt): financial institutions (29%), funds (24%), social security (23%), non-residents (9%), government (4% ), insurers (4%) and others (7%), among which the investors of the Direct Treasury.

However, the calculation is much more complex. For example, when Caixa's treasury was under my management, it became the largest bank. We earned 68% of Caixa's profit and returned a good part of it with dividend payments to the Treasury.

Another problem in personal example: I have my money in CDB 100% DI. I receive interest referenced to the Selic and on this funding rate the bank puts a spread to lend. High interest rates make financial leverage difficult and, ultimately, the debtor pays. Should it be accounted for? How to calculate without double counting? Via balance sheets from all banks?

*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Support and enrichment network.

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