LatinFinance - March/April 2015 - 32
BRAZIL
ECONOMY
Dilma Rousseff's new finance minister has the confidence of the
market. But bringing Brazil's accounts into line is likely to make him
unpopular at home. By Thierry Ogier
Bitter potion
A
tall, relaxed
bespectacled man was waiting patiently on
a cushy sofa for his next appointment at the
St Regis hotel during the latest annual IMF
meeting in Washington.
In spite of the political tensions at home
amidst a tough presidential election and
global financial uncertainties, the then chief
executive of Bradesco Asset Management
(BRAM), Joaquim Levy, did not seem to
have any problem to "sell Brazil" with a
broad smile on his face.
Asked if he would consider becoming
Dilma Rousseff's finance minister should
she win the run-off at the end of that month,
Levy kept a smile on his face. "I have not
received any phone call," he told this
correspondent.
Yet a few weeks later, the phone rang.
When he finally took the job, he put an
end to several weeks of speculation and
uncertainty among investors, who had
also picked the previous central bank
governor, Henrique Meirelles, and the CEO
of Bradesco, Luiz Carlos Trabuco, as other
potential candidates.
To most investors, Levy looks like the
right man at the right place at the right
time - unlike his predecessor, who was not
widely liked by the financial community.
"I am pretty sure that Joaquim is indeed
[the right man]. We will have to see if he
delivers the results now," says Fernando
32 L ATINFINA NCE.COM - March/April 2015
Honorato Barbosa, who used to work
with Levy as BRAM's chief economist.
In private, a senior banker admits
there is a real concern that credit
ratings agencies may be on the verge of
downgrading Brazil's sovereign debt and
that the budget tightening promoted by
Levy is Brazil's best chance to avoid losing
its investment grade.
Indeed, Brazil has a huge mountain to
climb. "It is difficult to say whether the
country will manage to go through a stage
of 'blood, sweat and tears' after so many
years of 'sex, drugs and rock and roll'.
This is not going to be easy to implement,"
says Luis Stuhlberger, managing director
of Verde Asset Management.
The hangover hits
Fixing Brazil will not be an easy task.
Levy's orthodox adjustment potion, a
bitter mix of tax rises and spending cuts,
will be a sobering experience - especially
after 2014, a year of living dangerously.
Deficits have worsened to the point
where some are threatening to get out
of control. Rising public spending in an
election year and falling tax collection
together with a stagnant economy, as well
as tax breaks for various sectors, have led
to a whopping 6.7% of GDP fiscal deficit
last year, more than twice as much as that
of 2013. The emerging market average is
below 2%, according to the IMF.
Fiscal accounts have deteriorated to a
point where instead of obtaining a primary
fiscal surplus (before interest payments),
as required by law, Brazil registered a
primary fiscal deficit of 32.5 billion reais
($11.3 billion), equivalent to 0.6% of GDP in
2014. It was the worst performance since
the 1990s.
As a result, Brazil's gross public debt has
reached 63.4% of GDP in 2014 (according
to the Brazilian methodology), up 6.6
percentage points from the previous year.
Shortly after his appointment, Levy's first
move was to set new primary fiscal targets
at a surplus of 1.2% of GDP for this year, and
2% of GDP for the following two years.
"He is no savior of the nation, but it
was about time [that someone like him
was appointed]," says Jean Louis Martin,
head of macroeconomic research at Crédit
Agricole in Paris. "The public finances
drift was unsustainable. There is nothing
irreversible here, but the fact is that
Brazilians are already paying dear to service
their debt and they cannot afford to let it
grow."
The trend will not be reversed
immediately. The central bank admits that
gross public debt may reach 65.2% of GDP
this year, while it expects that net debt will
increase to 38.2% of GDP (from 36.7% in
2014).
Levy, who acknowledges that gross
debt may only stabilize from 2016 before it
declines, says it should then trend towards
50% of GDP. "This is a positive, long-term
objective," he said over breakfast with
journalists in Brasilia. "The length of time
that is needed will depend on fiscal policy
and GDP growth," he said.
Even when he was part of the banking
community, Levy never joined the chorus
of investors who blasted Brazil for its
unorthodox economic policies and its
tropical version of state interventionism.
Nor did he buy the concept of the "Fragile
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LatinFinance - March/April 2015
Table of Contents for the Digital Edition of LatinFinance - March/April 2015
Contents
LatinFinance - March/April 2015 - Cover1
LatinFinance - March/April 2015 - Cover2
LatinFinance - March/April 2015 - Contents
LatinFinance - March/April 2015 - 2
LatinFinance - March/April 2015 - 3
LatinFinance - March/April 2015 - 4
LatinFinance - March/April 2015 - 5
LatinFinance - March/April 2015 - 6
LatinFinance - March/April 2015 - 7
LatinFinance - March/April 2015 - 8
LatinFinance - March/April 2015 - 9
LatinFinance - March/April 2015 - 10
LatinFinance - March/April 2015 - 11
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LatinFinance - March/April 2015 - 16
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