LatinFinance - September/October 2015 - 40

IMF/
WORLD
BANK
SPECIAL

Some ups and downs are to be expected as Brazil pursues a classical adjustment
regime, argues the deputy governor of Brazil's central bank. By Thierry Ogier

Luiz Awazu Pereira
Cushioning the fall

razil's high inflation, waning growth and troubled government finances have
concerned credit analysts' for some time. Moody's is the latest ratings agency to act on Latin
America's biggest economy, knocking it down a notch to Baa3, its lowest investment grade
rating, in August.
The move came after President Dilma Rousseff slashed the government's primary surplus
target to 8.747 billion reais ($2.5 billion), a roughly 87% decrease from the original 66.3 billion
reais target, in June. Finance Minister Joaquim Levy pointed to a decline in tax revenues as the
main cause for the adjustment.
Rousseff also cut $8.6 billion reais in government spending. The move in fiscal policy
comes as the central bank's monetary policy committee has been aggressively hiking interest
rates to combat inflation.
Socking away foreign currency reserves, strengthening the financial system with a move
to Basel III rules and tackling inflation should strengthen the country's defenses, Luiz Awazu
Pereira da Silva, deputy governor of Brazil's central bank, tells LatinFinance.
Brazil's latest approach to monetary policy is two-fold. On the one hand, the central bank
has been looking to get on the offensive when it comes to anticipating externalities and their
potential impacts, according to Pereira. But on the other, much of Brazil's monetary policy is
an extension of coping with the global financial crisis and its consequences.
Regardless, short-term pain for long-term gain is crucial for understanding the policy
shifts. "Once you are adjusting, perseverance is of the essence because policies take time to
produce their intended effects. That's exactly what we're doing this year," says Pereira da
Silva, who is due to begin a five-year term as deputy general manager of the Bank for International Settlements on October 1.
In his final months at Brazil's central bank, where he has been since 2010, Pereira da Silva
spoke to LatinFinance about central banking in Brazil and Latin America. This is an edited
transcript of the conversation.
LF: During the past 20 years, the Brazilian economy has experienced some volatility.
What is your take on the current situation in light of your experience during all these
years in Brasilia?
LP: Policy-making is a lot of art with a bit of science. It consists of understanding political
economy constraints and combining them with sound analytical judgment to identify where
to improve policies by continuously adjusting and reforming. Once you are adjusting, perseverance is of the essence because policies take time to produce their intended effects. That's
exactly what we're doing this year.

40 L ATINFINA NCE.COM - September/October 2015

In 2015, Brazil is undertaking a classical
adjustment process to reduce macro imbalances in its fiscal and current accounts and
the adjustment is working. Inflation is high
due to a relative price adjustment in early
2015, but monetary policy is addressing
its second round effect to put inflation on
target by the end of 2016 and anchor expectations. Initial results are showing we're on
the right track, but as with any country and
any adjustment process, there are ups and
downs. That's why, despite these ups and
downs, we preserve a cautious optimism in
Brazil because we've seen all sorts of crises,
always recovered, and managed to enhance
our potential.
The Brazilian experience might be useful
to illustrate how we strengthened our policy framework to face the global financial
crisis and its consequences. First, we kept
an independent monetary policy and acted
with determination to address domestic
inflationary pressure coming from external
exuberance. Second, we reinforced the robustness of our Basel III-compliant financial
system to tame the rise of excessive financial risk. Third, we added macro-prudential
policies to avoid excessive domestic credit
growth. Fourth, we used foreign exchange
interventions to smooth volatility and
provide forex hedges to our domestic firms.
Finally, now that we are approaching the
prospects of a forthcoming rate rise in the
US, we're further tightening our fiscal and
monetary policies.
LF: How will Brazil be able to absorb
the change in US monetary policy? Will
higher US interest rates mean capital
outflows and exchange rate volatility?

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