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The Economist: Brazil's economy; the new brooms

The Economist: Brazil's economy; the new brooms

Posted by Elis Monteiro on November 29, 2014

She finally did it. Nearly a week after her intentions were trailed in the Brazilian press President Dilma Rousseff, who narrowly won re-election in October, named her new economic team yesterday. Joaquim Levy (pictured above, in focus) will be the new finance minister and Nelson Barbosa (right) the minister of planning. Alexandre Tombini (left) keeps his post at the head of the central bank. As Bello explains this week (in a column written just before the appointments were made official), they portend a big change from the course Ms Rousseff pursued during her first term.

Brazil’s GDP report today underscores just why change is needed. The economy grew a negligible 0.1% in the third quarter of 2014, half the expected rate. After two consecutive quarters of shrinking output, the growth in the third quarter ends a technical recession. But it was mainly due to a burst of pre-election spending by the government. As the new economic team tightens fiscal and monetary policy, growth is likely to fall back in the near term.

Just how they plan to proceed became a little clearer at the press conference convened yesterday by the newly formed trio. Mr Levy said the target for the primary surplus (before interest payments) will be reduced to 1.2% of GDP in 2015, and lifted back up to 2% thereafter. The point is to shore up confidence, which has been sorely lacking. Brazil badly missed its 2014 target of 1.6% of GDP. The less-ambitious goal is more likely to be met. Greater certainty will encourage more private investment, or so Mr Levy hopes.

Mr Levy and Mr Barbosa will not start their new jobs right away: there will be a transition period as they work alongside Guido Mantega, the outgoing finance minister, and Miriam Belchior, the planning minister. It will be a delicate time. While the new team tries to revive confidence among investors it will have to dodge criticism from the left wing of Ms Rousseff’s Workers’ Party (PT), which prefers the incumbent finance minister. The president did not show her face at the announcement and press conference on Thursday, which suggests how difficult this volte-face is for her.

The triumvirate sought to reassure sceptics in the PT along with the markets. They promised to move forward “without any big surprises”. Mr Levy—“Scissorhands” to some Brazilians—is expected to unveil gradually whatever spending cuts he has in mind.

Asked if there is a contradiction between the social progress Ms Rousseff promised during her election campaign and spending cuts to bring deficits under control he gave an answer that is likely to become a mantra during the president’s second term: “The economy will be balanced to guarantee that we can continue advancing socially.” Ms Rousseff had forgotten to maintain the growth and confidence needed to ensure social gains; now, perhaps, she has remembered.

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