Dilma Rousseff puts Brazil back on path to economic orthodoxy
November 12, 2014 12:54 pm
Joe Leahy in São Paulo
At the height of Brazil’s bitterly fought election campaign in October, President Dilma Rousseff seemed to eschew any regard for market economics.
To satisfy militant leftist supporters of her Workers’ Party, she painted members of the opposition PSDB party, known as tucanos, and its pro-business presidential candidate, Aécio Neves, as bloodsucking bankers.
“Those tucanos?.?.?.?implant inflation so they can collect interest,” she told an audience in Recife in Brazil’s poor northeast, the region whose support ensured her narrow 3 percentage point win in the election on October 26. “Today, Brazil has the lowest interest rates in its history,” she said during another encounter.
Three days after her victory in the election, however, the central bank did exactly what Mr Neves had been advocating – it increased interest rates to their highest level in three years to control inflation that is above the official target range ceiling of 6.5 per cent.
Aécio Neves’ proposals The policies proposed by opponent that are now being implemented by Dilma Rousseff
Indeed, since the election, Ms Rousseff has quietly begun implementing several elements of Mr Neves’ platform to try to rebalance Brazil’s stagnant economy. Her stance has prompted jokes on Facebook that Mr Neves in fact won the election. The only difference is that Ms Rousseff’s version of his policies lacks her rival’s reformist zeal.
“This approach in Aécio’s case would have been driven much more out of conviction about what needs to be done to recover credibility while for her it seems to be driven much more by necessity,” said João Augusto de Castro Neves of Eurasia Group.
Ms Rousseff’s apparently reluctant reversion to more orthodox economics could not have come at a more important moment, economists say.
The country has been running a fiscal stimulus since 2011 to try to counter the fallout of the eurozone crisis, the end of the global commodities supercycle and slower growth in China.
November 10: When Dilma Rousseff was re-elected as president of Brazil on October 26, she promised to be a much better president than she had been during her first term (which ends on December 31). Whatever she meant by that, analysts do not seem to believe it will result in a pick-up in economic growth.
The government has implemented the stimulus through ad hoc tax cuts and subsidised credit from state banks. It has offset the resulting inflation through currency and fuel and energy price controls.
But this heavy intervention has deterred investment while failing to lift growth. It has also undermined what was once one of the best-managed budgets in the emerging world. Brazil’s recurring primary budget surplus – the money left over before interest payments and excluding one-off items – will have slipped from 4 per cent of gross domestic product in 2008 before the global financial crisis to negative 0.4 per cent by the end of this year, according to Itaú-Unibanco.
Brazil needs to run a primary surplus of at least 2-2.5 per cent to prevent an increase in its gross public debt. Stabilising the budget could require cuts or tax increases or both worth between R$100bn and R$200bn, economists say.
“This course correction?.?.?.?[will be] hard to implement without an orthodox shift focused on controlling expenditures,” former central bank head Carlos Geraldo Langoni, founder of Projeta Consultoria, said in a note, Brazil Memo.
To try to achieve this, Ms Rousseff has implemented other parts of what was Mr Neves’ proposed agenda. She has raised fuel prices by between 3 per cent and 5 per cent, allowed the currency, the real, to weaken against the dollar, and has promised to cut back loans by development bank BNDES, the Workers’ Party’s key instrument for stimulating investment in infrastructure and industry.
But critics doubt her ability to deliver a true “credibility shock”. The election has left Brazil more divided than ever, with those dependent on social benefits, such as the Bolsa Família monthly stipend for poor families, voting for Ms Rousseff and those in the richer, industrialised south opting for Mr Neves.
Brazil needs to change a social contract built on rapid increases in spending on pensions, wage rises and other benefits made possible by a sharp rise in tax collection during the boom years of the past decade, said Samuel Pessoa, economist with FGV, an academic institute. It must reduce spending and increase the country’s already burdensome tax rates.
“More taxes are bad for growth but a fiscal imbalance is worse,” said Mr Pessoa.
Ms Rousseff will face a steep challenge, however, persuading a restive Congress of the need for fiscal discipline, analysts say. Even some of her own ministers have become more outspoken. Culture minister Marta Suplicy resigned this week with an open letter implicitly criticising the president’s economic policy making.
Ms Rousseff is set to choose a replacement for finance minister Guido Mantega, who was seen as overly optimistic and open to her interventionism, when she returns from the Group of 20 meeting in Brisbane this week.
All Brazilians hoped, Ms Suplicy said, that Ms Rousseff would choose an “independent economic team, experienced and proven, to restore confidence in, and the credibility of, your government”.
Government borrowing – Aécio Neves’ proposals now implemented by Dilma Rousseff
Raise interest rates to control resurgent inflation – the central bank has increased the benchmark Selic rate to 11.25 per cent, the highest in three years. Mr Neves had proposed similar measures for controlling inflation. But markets are suspicious whether Ms Rousseff’s team will have the political will to see the policy through.
Raise fuel prices – Petrobras, the national oil company, has increased diesel prices by 5 per cent and petrol by 3 per cent. The end of fuel price controls are needed to allow the economy to return to market-based dynamics and to normalise Petrobras’ operations. But the increases were seen as too small to satisfy market demands.
Cut back state bank subsidised lending – finance minister Guido Mantega has suggested reducing subsidies by BNDES, the state development bank that is an instrument of government industrial policy. BNDES undermines monetary and fiscal policy by providing an off-budget stimulus to the economy. But few expect the government to significantly clamp down on subsidised funding.
Appoint a more credible finance minister – Mr Mantega, criticised for being over-optimistic and too pliant to intervention by the presidential palace, is to be replaced. The most credible rumoured candidates include former central bank governor Henrique Meirelles and former finance ministry official Nelson Barbosa. |
