LatinFinance - March/April 2014 - 44

and the current account deficit amounted
to 3.7% (up from 2.4% in 2012). foreign
direct investment is strong, but no longer
large enough to finance such a deficit.
this is not healthy when volatility is back
in the international capital markets. Risk
premiums have soared.
these developments are all a result of
poor economic policy choices, says marcos
lisboa, vice president of insper, a São Paulo
business school, and a former finance
ministry official. "Brazil is paying the price
for having adopted the wrong set of policies
in recent years," he says. "this has led to a
mediocre economic performance."
"from 2008, the government has
resuscitated the old development agenda
of the past, including protection for sectors
that are not competitive. this has brought
two negative consequences: it's deteriorated
the fiscal accounts significantly and it was
detrimental to productivity."
the government boosted the role
of BnDeS, the national development
bank, as part of its post-lehman countercyclical policy measures. massive fund
transfers from the treasury to BnDeS
have weighed on the gross public debt
burden, which amounted to 66.1% of GDP
in 2013, according to the imf (the Brazilian
government uses a different methodology
and says its gross debt has declined from
58.8% of GDP in 2012 to 57.2% at the end of
2013).
the BnDeS accounts for 8% of overall
gross public, according to João carlos
ferraz, a BnDeS director. last year, the
BnDeS received 39 billion reais ($16 billion)
from the treasury, compared to 100 billion
reais in 2009, and it says the amount of
transfers will continue to decline.
"Sobriety and caution are the main
characteristics of economic policy," says
João carlos ferraz, a BnDeS director.
But deeds speak louder than words.
"Patience towards Brazil has already run
out," says monica Baumgarten de Bolle, a
former imf economist and now director of
casa das Garças, a liberal economic policy
institute in Rio de Janeiro. She reckons the
primary budget surplus target should be
increased to 2.5% of GDP and that around
50 billion reais needs to be slashed from the
budget in 2014.
the government's latest commitment to
achieve a fiscal target of 1.9% of GDP in an
election year has divided opinion. marcelo
carvalho, latin america chief economist at
BnP Paribas in São Paulo, says that policy
rebalancing "is a good point. But there is a

44 l atinfina nce.com - March/April 2014

great deal of skepticism whether they are
going to deliver or not. it is a challenging
situation."
However, some are still ready to give the
government the benefit of the doubt. "the
proposed adjustment is a decent one, it
is credible," says octavio de Barros, chief
economist at Bradesco in São Paulo. "there
is no room for bluffing".
others say Brazil would have to gain
from adopting a multi-year fiscal target,
in order to avoid permanent short-term
anxiety, especially when an election is
looming.

Monica BauMgarten de Bolle,
director of casa das garças

"If the government
chooses to go
down the wrong
route, we are goIng to suffer. no
one has the patIence to waIt and
see whether thIngs
wIll eventually
fall Into place"
"everything is a matter of choice," says
Baumgarten. "if the government chooses to
go down the wrong route, we are going to
suffer. no one has the patience to wait and
see whether things will eventually fall into
place. either they do, and we manage to get
through US monetary transition, or they
don't. then we will have to deal with a lot
more market turmoil."
"the market is expecting a lot more than
a signal," says márcio Garcia, an economist
at both Rio's PUc University and mit in
the US. "this government has already
sent various signals in the past that did not
turn into concrete actions." He cites the
finance ministry's "creative account having
undermined its credibility "the finance
ministry team did everything to conceal the
actual results, so it is hard to believe them,"
he says.
Broken consensus
But these are difficult times for Brazil's
political economy. consensus over

economic policy has broken. the central
bank's Pereira still refers to three basic
pillars of orthodox economic policy - fiscal
discipline, inflation targeting and a floating
exchange rate - but investors are calling
for deeper change in fiscal and quasi-fiscal
policy in Brazil. this won't be easy to
achieve in an election year.
Yet Garcia says such a change is vital. it
would contribute to an orderly depreciation
of the real, while taking some pressure off
monetary policy, he says. expansionist fiscal
policy and absence of structural reforms are
seen as a threat to the sovereign ratings.
"the probability of a global capital
market crisis has increased a lot, as the US
central bank is withdrawing excess liquidity
it had introduced in the past," says Garcia.
"But economies that are unbalanced
are actually relatively small - argentina,
Venezuela, even turkey - so in the end it is
no big deal.
"the Brazilian economy is in a
reasonably good shape, after all. So if you
correct domestic economic policies, you
may register a fairly good performance
again."
"tapering is a redefining moment on the
global stage; there are more positive points
than negative ones," says BnDeS' ferraz.
outsiders express much deeper worries,
however. tony Volpon, head of emerging
markets research for the americas at
nomura Securities, for example, thinks that
simply relying on an as yet fragile recovery
in developed economies to lift all boats,
rather than tackling underlying domestic
economic challenges, will prove to be a
serious mistake.
"the next five years will be tougher than
the last five years for Brazil," he says. "if
you fool yourself into thinking you don't
have to make the hard decisions because
you are going to get bailed out by stronger
US growth, you haven't understood the
dynamic of what has been going on," he
says.
Volpon says there has already been a
four percentage point increase in the cost
of financing Brazil's domestic public-sector
debt over the past five years.
But the central bank's Pereira says fears
are overblown. "to adopt a doom and
gloom rhetoric regarding emerging markets
- saying they will enter in all-out crisis - is
not serious from an analytical point of view,"
he says.
"one may well say it is part of a trading
strategy, but you have to keep cool - and
differentiate." LF
http://www.LATINFINANCE.COM
LatinFinance - March/April 2014

Table of Contents for the Digital Edition of LatinFinance - March/April 2014
