Latin Finance - September/October 2014 - 62

BRAZIL
ECONOMY

Brazil's government will be confronted with an unappetizing list of
reforms to sharpen up the country's growth and investment environment
after the election, say private sector economists. By Thierry Ogier

Tough road ahead

he winner of Brazil's presidential elections this October will face an enormous
to-do list. With twin deficits, per capita economic growth close to zero and inflation at more
than 6%, most private-sector economists reckon a sharp policy adjustment is needed.
"Next year is going to be a very difficult year for Brazil," says John Welch, macroeconomic
strategist at CIBC World Markets in Toronto. "There are so many things they have to do at the
same time."
Among the most urgent needs, says Welch, is the removal of price controls, mainly on
gasoline, electricity and public transport. Unless the government also cuts its own spending,
this will generate inflation, likely meaning the base interest rate will have to rise to 13%, or
higher - compared to 11% in August - he says.
"You are going to have a real animal to tame," says Welch.
Greater fiscal discipline, including possible fixes like cutting the number of ministerial
portfolios from 39, has been a hot topic during the election campaign. The National Confederation of Industry, a business lobby group, has called for a new, clearly delineated structural
primary surplus target among its recommendations to the three main presidential contenders, for example.
Bernard Appy, economic policy secretary
under Luiz Inácio Lula da Silva, who preceded
Dilma Rousseff as president, agrees that any
party will need to restore the country's credibility with investors. Like Welch, he thinks
fiscal tightening after the election is inevitable
- and that will lead to a tough year for the
economy.
Economic growth is likely to return in the
second and third year of the new presidential
term, but it is important to give investors a
"sense of sustainability" on fiscal policy, even
if reforms are implemented gradually, says
Appy.
"It does not have to be done all within a
year, as long as the government enjoys some
credibility," he says.

62 L ATINFINA NCE.COM - September/October 2014

Budget slippage
In the lead-up to the election, the government's fiscal performance has been deteriorating. The country is officially pursuing
STATE LEADER: Under President
Dilma Rousseff Brazil's government has
taken a more interventionist approach to the
economy

©REUTERS

Nevertheless, unless an initial adjustment is made, Appy says "there is a risk that
you may have four years of low economic
growth".
Others dispute the timeline. Arminio
Fraga, a former central bank governor
advising pro-business opposition candidate
Aécio Neves, says the fiscal adjustment
should be carried out as quickly as possible.
"It can be done within a year," says Fraga.
The swifter approach is one Welch
prefers too, though he says none of the
candidates have promised sufficient readjustment measures. "The rot is much bigger
than people think," says Welch. "They
need massive fiscal austerity. It would solve
problems faster, and then they could move
on to more reforms."

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Latin Finance - September/October 2014

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