LatinFinance - September/October 2013 - 22

“if you don’t do the right thing, if you carry out inconsistent
economic policies in the medium run, you will lose confidence. it
is going to be harder for you to increase investment, to increase the
potential economic growth and harder to keep inflation on target,”
he says.
in the short term, that means the central bank will have to
keep tightening monetary policy even though economic activity
is lackluster. “the government has not been extremely forceful
regarding fiscal retrenchment,” says levy.

VOICES FOR CHANGE: Discontent
over poor infrastructure and rising
prices pushed Brazilians into the
streets in protest in June         

Restoring credibility
last year, the government resorted to what some termed creative
accounting to meet its fiscal targets. this included incorporating
dividends from state-owned companies and borrowing from the
sovereign wealth fund as well as excluding some infrastructure
spending in the primary budget balance calculation. mantega was
hauled before lawmakers to explain the actions.
ter-minassian says that such extra-budgetary moves have been
“very damaging to credibility”.
a central question is how the government can restore credibility
in fiscal policy, having resorted to such practices to paper over the
deterioration of its performance.

ARMINIO FRAGA, GÁVEA INVESTIMENTOS

 “Brazil’s policies have Become
interventionist, more focused
on puBlic government lending
and less capaBle of moBilizing
private capital”
mantega downplays the issue, claiming it was all “a
misunderstanding.”
“We are going to continue to reduce debt. We are seeking
a fiscal result that will give us strength,” he says. “there was a
kind of misunderstanding but it is now clear. there will no more
creative accounting in the budget. expenditure in the 2014 budget
will include no operations that could let people have divergent
interpretations.”
moreover, he says there is no need for the government to change
its approach. “We are not looking at a new economic or growth
model, but the continuation of an already successful growth model,”
he tells LatinFinance. “the fiscal policy is sound.”
fiscal discipline is nominally an official pillar of the government’s
economic policy. it even stands as one of the commitments that the
president made in the aftermath of social unrest in June.
But experts say any deeper structural reforms — including of the
pensions system, tax system and public administration — that could
put fiscal policy on a more stable footing will be left until after next
year’s elections. a range of politically sensitive microeconomic
reforms to enhance the business climate and boost competitiveness
are also likely to languish.

22 l atinfina nce.com - September/October 2013

Stalled progress
a lack of progress could have profound implications for Brazil’s
international standing. Standard & Poor’s put Brazil’s triple-B
credit rating on negative outlook in June, citing persistently poor
GDP expansion, weaker fiscal policy and a decline in government
credibility. Brazil’s position has now eroded to the point where
credit rating agencies are getting increasingly vocal about their next
moves.
“if all remains the way it is, the trend is that Brazil will get a triple-B
minus,” says Regina nunes, Standard & Poor’s managing director in
latin america. a credit downgrade would put Brazil’s rating just one
notch above junk status, making corporate and sovereign borrowing
more costly while further crimping economic growth.
“a credit downgrade [by S&P] is not only not farfetched, in fact it’s
quite likely,” says ter-minassian.
few people believe the administration will amend its policy mix
in the run up to next year’s vote. “economic policy has to change,
but it is not going to, at least until the elections,” says Besaliel
Botelho, chief executive of Robert Bosch, a technology provider to
the industry in campinas, São Paulo.
if anything, the situation is likely to deteriorate. the iif stresses
the “risk of further fiscal policy slippage as the government
scrambles to bolster popular support for president Rousseff.”
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