Latin Finance - September/October 2014 - 64

a primary surplus target of 1.9% of GDP in
2014. But deficits in May and in June pushed
the budget deficit to 3.6% of GDP in June on
an annualized basis.
According to research from Bradesco
Asset Management, the consolidated public
sector surplus totaled 29.4 billion reais ($13
billion) in the first half of 2014. That was less
than 30% of the government's annual target. The state had fulfilled 47.1% of its 2013
target by the same point last year.
"The current government has given up
on its fiscal target. It has been testing the
market and rating agencies to see how they
will react," says Raul Velloso, a specialist on
fiscal issues in Brasilia.
Velloso says the government's record in
recent years has been so bad that it would
be wrong to assume the state will adjust
policy if Rousseff was re-elected. "I tend to
think they would only change if the government comes under very strong pressure
from the markets, which would create a
crisis of great proportion," he says.
Such a crisis may be unlikely, according
to Velloso, as Brazil's "capacity to resist external pressures" is higher than in previous
decades, due to its central bank reserves:
around $376 billion in July, according to the
IMF.
But Welch says a scenario where the government continues as before will just mean
an even bigger adjustment later.
Whether or not an immediate fiscal
policy turnaround happens, however,
Velloso and other market-orientated economists say that much more than a temporary
fiscal fix is needed. The next administration

JOÃO CARLOS FERRAZ, BNDES

"IN THE COMING
YEARS, INVESTMENT
WILL GAIN
IMPORTANCE IN
OVERALL AGGREGATE
DEMAND IN BRAZIL"

must show appetite for deeper reforms,
including to tax, pensions, the minimum
wage and the business climate, they say.
"The country must pursue an agenda
towards increased productivity and efficiency, and less bureaucracy," says Appy.
Reforming the minimum wage is one
area that holds particular importance in
Brazil: benefits to pensioners and smallholder farmers are linked to it. Economic
growth, as well as inflation, determines
rises in the minimum wage.
Bruno Leal de Barros, an economist
at FGV-Ibre, a research institute in Rio de
Janeiro, says the next government must
thoroughly review these policies: limiting
rises in the minimum wage to inflation, and
removing the link to GDP growth.
The additional bonus also needs to be
addressed, he says. That costs the economy
0.3% of GDP per year, and must be paid to
all workers who earn less than twice the
minimum wage, on top of an annual "thir-

Eduardo Campos

Campaign tragedy
Brazil's presidential election campaign took a tragic turn when Eduardo Campos, the
Socialist Party candidate, died in an air crash on August 13th. His death shocked the
electorate.
For the past twenty years, Brazilian presidents have come from either the Workers'
Party, of former president Luiz Inácio Lula da Silva and incumbent Dilma Rousseff, or
the Social Democratic Party of former president Fernando Henrique Cardoso and opposition leader, Aécio Neves.
Campos tried to open a third way.
Marina Silva, an environmentalist, became the PSB's candidate. Her economic advisers include André Lara Resende, one of the architects of the so-called Real Plan, which
put an end to hyperinflation in the mid-1990s. She has pledged to stick to fiscal responsibility, inflation targeting and a free-floating exchange rate. She has also endorsed Campos' intention to grant formal autonomy to the central bank.

64 L ATINFINA NCE.COM - September/October 2014

teenth month" bonus, he says.
Velloso says this kind of more conservative fiscal management should be combined
with reformist zeal, to open the way for
the private sector to fill the gap left by the
government - although it is highly doubtful
whether this will come to pass.
"Would Dilma do it? I doubt it: only if
she finds herself in a tight corner," he says.
"The other candidates may be more willing
to do so, but there is no guarantee that they
would."
Government officials, meanwhile, tend
to defend the existing approach. João Carlos
Ferraz, planning director at national development bank BNDES, extolls the benefits
of transfers of more than 330 billion reais
from the federal treasury to the lender in
the past five years. He argues that while this
adds to overall public liabilities, it is preferable to the approach pursued by developed
markets - in other words, quantitative
easing.
Like other officials close to the government, Ferraz says Brazil's slowdown is
only temporary. The economy is still "in
transition" against a complex international
environment. The economy will soon be
able to pick "low hanging fruits", thanks
to maturing investment (partly thanks to
BNDES) in key areas of the economy, such
as infrastructure and logistics, says Ferraz.
"In the coming years, investment will
gain importance in the overall aggregate
demand in Brazil," he says.
No apology
Nevertheless, many economists bemoan
the entire post-2008 approach in Brazil of
state-spurred economic growth. They say it
has led to a decline in productivity.
"Brazil used to have an agenda to
strengthen market structures: create
regulatory agencies with clear mandates,
encourage good governance, ensure
transparent public accounts," says Marcos
Lisboa, another economic policy director
under former president Lula.
"Unfortunately, we have suffered a
setback, mainly since the 2008 crisis, with
more discretionary actions from the government, more subsidies and more protection for some industries," he says.
Ferraz, however, has no apology for
such policies, although he acknowledges
the need to attract long-term private investment to reduce the burden on BNDES.
"We do not have any structural issues;
we do not need any structural adjustment,"
he says. LF

http://www.LATINFINANCE.COM

Latin Finance - September/October 2014

Table of Contents for the Digital Edition of Latin Finance - September/October 2014