Brazil: VistaBrazil December 2014

Last Updated: 31 December 2014
Article by Veirano E Advogados Associados

Markets are cheered by Rousseff's new economic triumvirate

President Dilma Rousseff on 24 November announced the ministers who will spearhead a new drive to strengthen the so-called macroeconomic tripod: a primary surplus in the public accounts, a strict inflation target, and a floating exchange rate regime.

Joaquim Levy takes over the Ministry of Finance from Guido Mantega, Alexandre Tombini will stay on as president of the Central Bank, and former treasury secretary Nelson Barbosa will take over the Planning and Budget Ministry from Miriam Belchior, thus overseeing the country's major infrastructure projects.

A combination of falling economic growth and rising gross public debt has placed Brazil's investment grade rating in question, and the new economic triumvirate faces multiple challenges. Analysts expect the Brazilian GDP to grow by just 0.2 percent this year, after the economy dipped into recession in the first half of 2014. Inflation has spent much of the year near or above the Central Bank target ceiling, and the budget deficit is widening.

Now, for the first time in many years, Brazil will have a long-term public accounts policy. Levy wants to restore a creditable primary fiscal surplus – the budget surplus prior to interest payments – and thus set the country on track to more sustainable economic growth. "The immediate objective ... is to establish a target for the primary fiscal surplus for the next three years that is compatible with the stabilization and decline of gross public debt in relation to GDP," the new minister announced.

The minister has set a primary surplus target of 1.2 percent of GDP in 2015 and 2 percent in 2016 and 2017. "Meeting those targets is fundamental to restoring confidence in the Brazilian economy," he declared, adding that just as the government is trying to improve its savings rate, it needs to encourage Brazilians to save more.

To achieve his goals, Levy plans to adopt a new financing model to counteract the negative effect of fiscal policy and accelerate growth in a diversified and competitive manner. This will require a restructuring of credit policy, with greater resort to the capital markets for financing infrastructure projects.

Bridging the budget gap?

In the short term, the government pledged to close this year with a primary surplus at US$3.87 billion.

After five months of deficit the government managed to post a primary budget surplus of US$1.63 billion in October, so it is heading in the right direction, but meeting the ambitious goal would require a surplus of US$8.29 billion in the last two months of 2014, and the gap is likely to prove too wide to bridge.

Outgoing finance minister Mantega has already said the government won't meet its 2014 target of 1.9 percent of GDP. At the outset of 2014, the government set the target for the consolidated primary surplus – which adds figures for states, municipalities, and some state-owned companies – of 2.15 percent of GDP. It then lowered the target to 1.9 percent and is now seeking congressional approval to cut that to just 0.19 percent.

The new team indicated that the management of public accounts and interest policy will be crucial for the resumption of business and consumption. The minister of finance will have to manage accounts so as to justify his nickname of "Scissorhands" – bestowed on Levy by Workers' Party stalwarts when he was head of the Secretariat of the Treasury during Luiz Inácio Lula da Silva's first term.

Tackling inflation

The economic trio also pledged to tackle inflation head on, with a target of 4.5 percent per annum, as against the current – and currently exceeded – ceiling of 6.5 percent. At his appointment, Tombini spoke about the importance of controlling inflation and said that tighter fiscal policy will help achieve that goal and increase business confidence as well.

The Extended National Consumer Price Index (IPCA) rose 0.51 percent in November, according to the Brazilian Institute of Geography and Statistics (IBGE). The rise was driven primarily by continuing pressure on meat prices due to drought and a recent Russian decision to bypass the US market in favor of Brazil. Meat prices surged by 3.46 percent in November, as against 0.77 percent for food overall.

The cumulative rate for 2014 closed at 5.58 percent, versus 4.95 percent for 2013. The 12-month inflation rate, at 6.56 percent, was below the 6.59 percent of the previous 12 months but still above the government target.

To curb inflation, Central Bank raised the target lending rate on 3 December to 11.75 percent from 11.25 percent but dampened speculation of a further hike in borrowing costs with a statement that future increases will be conducted with "parsimony."

At the Planning Ministry

Barbosa, who worked alongside Mantega in Finance from 2006 to 2013, reaching the Number 2 post of executive secretary in 2011, says that his goal as budget minister will be to improve the efficiency of public spending and to increase investment and economic productivity.

Barbosa explained that his portfolio will absorb some programs currently entrusted to other ministries, such as the Minha Casa Minha Vida (my home my life) housing program, as well as concession of public services. He also promised to increase the investment rate and productivity index. The markets reacted well to the announcement of the new policies.

What about autonomy?

The appointment of the new economic triumvirate is potentially a significant turning point for the Brazilian economy. It is an indication, according to analysts, that President Dilma Rousseff has heeded financial markets' call for more rigorous spending controls, less government intervention in state-controlled companies and other parts of the economy, and a longer-term strategy for economic policy.

Answering skeptics who doubt he will maintain his independence from Rousseff – who has been criticized for heavy economic interventionism – Levy said he believed the team had sufficient "maturity" to handle such issues. "Autonomy has been given. The objective is clear," he said.

One of his principal challenges will be to sell a rigorous fiscal adjustment program to other sectors of the government and the dominant parties in the coalition.

Social program expenditures altogether account for nearly 80 percent of the government's primary expenses.

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