“Brazil devalues.” The warning that gave the initial blow to convertibility in January 1999 became a reality that exposed the empty shell in which the proclaimed regional integration collided with the urgencies of the economic policy of cabotage. The emergency was not minor: at that time, as now, Brazil was the relevant trading partner and a devaluation worsened the terms of trade of the Argentine economy, burdened with taxes in times of a cheap dollar. History threatens to repeat itself this year.
Origin
This year, Mercosur celebrated four decades since it began taking firm steps until the formalization of its regional integration. However, what seemed like an auspicious path towards complementarity and expansion of the common economic space could not overcome the chronic economic instability of the largest members (Brazil and Argentina). What, in other international references, such as the European Union or NAFTA (Mexico, Canada and the United States) was an institutional, customs, fiscal and even monetary arrangement (with the countries of the euro zone), in South America suffered the vicissitudes of uncoordinated economic policies and the veiled intention to cannibalize the common market itself.
The reconsideration of the opening of the customs fortress that Mercosur was becoming with tariff and non-tariff protections comes at a time when the Brazilian economic model with which it managed to escape hyperinflation, first, and then economic stagnation, is also breaking down. even with antagonistic political signs in power. As pointed out Jorge Colina, IDESA economist, Argentine exports to Mercosur fell from 29% of the total in the decade 1995 to 2004 to 26% in the following decade and only 20% in the last decade (2015-2024).
The mirror
For Jorge Vasconceloschief economist of the IERAL, the neighboring country constitutes a close example of what it calls “half-finished reforms” and positive, but not extraordinary, results, “From 2016 to 2024, andBrazil’s GDP grew at a cumulative annual rate of 1.9% and formal private employment grew at 1.4% annually.based on a profound labor reform and the setting of a ceiling on public spending that in the first years made possible a simultaneous drop in inflation and the interest rate,” he explains. The contrast with Argentina is notable, verified on the foreign trade side: between 2016 and 2024 it was observed in the 23.4% annual increase in oil exports; 11.2% of the mining complex; of 9.9% annually of agricultural exports and 7.9% of cellulose.
For its part, Marcelo Elizondodirector of the consulting firm DNI and president of the Argentine chapter of the International Chamber of Commerce, the imbalance in Brazil ended up generating what he describes as “a mini-crisis.” In his opinion, it is not actually devaluing its currency strategically to be more competitive, but rather it is suffering market pressure against the real due to distrust in relation to the fiscal policy that the Government is announcing. Therefore, this could generate a slowdown in the economy, which today has been growing at 3.5%. Perhaps an increase in the interest rate by the Central Bank of Brazil, which is autonomous there (even with an authority that comes from before Lula’s current mandate and which Lula wants to remove with his corresponding political noise) worsens the financial deficit. of the Government.
“The market is nervous. Brazil is facing a wave of distrust on the part of the market, a certain outflow of capital, sale of shares and public securities, with a very high budget deficit of almost 10% of GDP with a large component of the financial deficit”, argues Elizondo. This could generate a slowdown in the Brazilian economy if it is not managed correctly in time and if the Government does not regain confidence, because the market is believing that politics is prevailing over fiscal quality.
In a country with an economy four times the size of Argentina’s, this induces the Lula administration to prioritize domestic economic policy and postpone any discussion on the future of Mercosur, which, furthermore, does not have much urgency to modify. A clear example of the lack of coordination of internal policies because with different timing Uruguay, Paraguay and now Argentina proposed the “internationalization” of Mercosur. Somehow Brazil refused, except in the case of the delayed agreement with the European Union.
Neighbors
Brazil’s concern to overcome its internal imbalances is a move that will have its negative impact on the rest of the economies in the region, but particularly, once again, it could hit Argentina at a time when exchange rate policy is under the microscope. International Monetary Fund. A slowdown in Brazilian economic activity would reduce Argentine exports to that destination, but could also generate additional competition in the global market.
The deficit in public accounts in Brazil in the year-on-year period in October rose to 1.09 trillion reais (US$181 billion), equivalent to 9.5% of GDP. according to the latest data from Central Bank of that country. The negative gap had been falling from 10% of GDP in July to 9.3% of GDP in September, but it jumped again in October.
In 2022, the last year of the government of Jair Bolsonarothe deficit had been 4.6% of GDP, but it jumped to 7.7% of GDP in 2023 (Lula’s first year) with the increase in public spending, especially in various social programs. For this year, estimates foresee a deficit of 10% of GDP and this imbalance mobilized the Government to
an ambitious cost reduction program with which it expects savings of US$11.7 billion over the next two years. Something that did not satisfy either the markets or its own political support. The Minister of Finance, Fernando Haddad, maintained that the goal is to be able to conclude 2025 without a primary deficit in public accounts (something already promised and unfulfilled for last year). The primary deficit (before payment of debt interest) was about US$36.9 billion year-on-year in October, which is equivalent to 1.95% of GDP. But the public debt rose to 9 trillion reais (US$1.48 trillion), which is equivalent to 78% of GDP.almost 4% more than the stock accumulated last December. Quite a challenge at a time when interest rates could rise globally and domestically, as a result of the established distrust.
The Argentine situation, on the other hand, is taking a different path. The bulk of the fiscal adjustment and the slowdown in the need for domestic financing has already been carried out. The country risk remained around 750 basis points, the exchange gap fell below 9% and with the last Treasury tender, almost 100% of the November maturities were completed, thus validating a drop in the rate. interest rate of the Lecaps to the area of 2.6/2.7% monthly, below the monetary policy rate (2.9% monthly) and an extension of the terms of the peso debt. In this context, activity is already showing signs of having left the bottom behind and, although unevenly, is recovering last year’s levels.
According to IERAL estimates, with data on the level of activity until September and evolution of foreign trade accounts until October 2024, it is confirmed that the floor of the recession was located last April, and that the rebound in five months has been 4.0%, according to the variation of the seasonally adjusted estimator. In that period, non-energy imports went from US$4.5 billion to US$5.8 billion (+29.6%). Since April, for each point of GDP recovery, the increase in non-energy imports was no less than 7.5 times, derived from pre-existing restrictions on foreign trade. But it may also be anticipating a “pro-import bias” of the current rebound from the recession. The battle on the external front has just begun and local producers know it.
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