Davos 2015: Brazil warns of austerity

Gideon Rachman and Joe Leahy – Financial Times, 1/22/2015

Brazil is in for a period of austerity and supply side reform, including the potentially controversial overhaul of social welfare programmes, such as unemployment benefits, according to Joaquim Levy, the new finance minister.

Speaking to the Financial Times in an interview at the World Economic Forum in Davos, Mr Levy said that, in order to get government finances into order, “we will have to cut in several areas”. He stated his intention to “get rid of subsidies and get prices right”, highlighting “energy and other areas” as potential targets. In addition, Mr Levy wants to see reform of government welfare programmes, arguing that the design of Brazil’s unemployment benefit schemes is “completely out of date”.

Mr Levy acknowledged that a period of austerity could have an impact on economic growth, saying: “I think flat growth cannot be discarded as a possibility although GDP growth in Brazil is resilient.” He argues that Brazil is now more in need of supply side reforms than a stimulus to demand and expressed confidence that “as we get our house in order, the reaction will be positive”.

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Brazil’s Rousseff Cancels Davos Trip To Attend Bolivian President’s Inauguration

Brianna Lee – International Business Times, 1/14/2015

Brazilian President Dilma Rousseff has been focusing her energy on restoring investor confidence in Brazil just months after narrowly winning her second term against a market-oriented opponent. But she is now drawing attention for scrapping plans to attend the World Economic Forum in Davos, Switzerland, next week, opting instead to go to the swearing-in ceremony of Bolivian President Evo Morales.

Rousseff had not confirmed her attendance at the forum, which takes place Jan. 21-24. According to local reports, she made a late decision Tuesday not to attend the international meeting so that she could travel to La Paz, Bolivia, for Morales’ inauguration as he starts his third term. Newly appointed Finance Minister Joaquim Levy and Alexandre Tombini, the president of Brazil’s central bank, will go to the forum to represent the country.

The president sparked criticism for her decision, with Brazilian weekly magazine Veja commenting that it would have been an “opportune moment” for her to restore investor confidence by attending the Davos meeting, given Brazil’s “worsening economic indicators and external pessimism.” But Brazil’s Estadão newspaper, citing an unnamed presidential aide, said the president was concerned about stoking domestic political turmoil with an overseas trip in the wake of looming legislative elections.

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The grass is greener from the outside

The Economist, 3/18/2014

BRAZIL’S government has been trying hard of late to burnish its economic credentials, dented by years of perceived interventionism, weak growth and high inflation. In February the president, Dilma Rousseff, sweet-talked investors in Davos for the first time since she took office in 2011. Later that month her finance minister, Guido Mantega, presented a revised budget for 2014, with 44 billion reais ($19 billion) in cuts and a target for the primary surplus (ie, before interest payments) of 99 billion reais, or 1.9% of GDP.

In the past few days, however, the government’s credibility has taken a knock. First, on March 13th, Mr Mantega conceded that the 9 billion reais set aside to prop up electricity utilities, reliant on hydropower but forced by lack of rain to tap pricey thermal plants, would not be enough. Another 12 billion reais would be needed, he said.

The Treasury would stump up 4 billion reais, financed in part by raising already-high taxes. The remaining 8 billion reais is to come from bank loans to the Electrical Energy Commercialisation Chamber (CCEE), a clearing house for the electricity market. The cost would be passed on to consumers, albeit only after the general election in October. Why private banks would lend that sort of money to a private entity with no assets to speak of is unclear. State-controlled lenders may end up having to step in, ultimately putting the government on the hook.

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Brazil looks outward, cautiously

Tim Ridout – The German Marshall Fund of the United States, 2/18/2014

In January, Brazilian President Dilma Rousseff attended the World Economic Forum in Davos for the first time in her three-year presidency. The foreign and trade policy platform of her Workers’ Party (PT) has been premised on a declining West, a transformed international order favoring emerging economies, and skepticism of free trade and open markets. But Rousseff is feeling intense pressure from her people to deliver better government services and economic prospects, as evidenced by massive street protests last June.

Rousseff’s visit to Davos came as the EU and Mercosur prepare toexchange proposals in newly revived free trade negotiations. She is also heading to Brussels on February 24 for a summit with EU leaders, where they are expected to discuss the negotiations and to sign a bilateral air travel pact that will increase passenger volumes between Brazil and Europe.

After a spate of economic growth that peaked in 2010 at 7.5 percent, Brazil’s economy slowed to 2.7 percent in 2011 and 1 percent in 2012. The growth rate for 2013 is expected to be about 2.5 percent. These disappointing numbers can be attributed partly to the drop in global commodity prices, but also to Brazil’s protectionist policies, poor infrastructure, unwieldy bureaucratic red tape, and its statist approach to investment. The Brazilian economy has not proven nimble enough to adjust to changing global realities, especially as investment flows back to the United States. Rousseff may have had little choice but to reassure business leaders at Davos that Brazil is committed to fiscal responsibility, openness to investment, combating inflation, and maintaining a floating currency.

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Brazil’s Rousseff tries to win over jittery investors at Davos

Reuters, 1/24/2014

Brazilian President Dilma Rousseff defended her administration’s management of a struggling economy on Friday though stopped short of offering concrete steps to calm investor nerves in the midst of an emerging market sell-off.

In what aides described as a major speech designed to regain foreign investors’ trust at the World Economic Forum in Davos, Switzerland, Rousseff reiterated a commitment to balanced public finances and inflation targeting amid mounting investor criticism of her administration.

“I want to emphasize that we will not be weak on inflation,” Rousseff said. “On the other hand, fiscal responsibility is a basic principle of our vision for economic and social development.”

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Brazil stocks are cheap after China woes

Matt Clinch – CNBC, 1/24/2014

It’s the perfect time for investors to lead the charge back into emerging market Brazil, according to the country’s finance minister, who told CNBC that China growth fears have dragged stock prices down to very attractive levels.

Guido Mantega, Brazil’s finance minister, said the county’s stock market has become strongly dependent on China, with its heavy link to commodities. On Thursday, fresh data showed China’s manufacturing activity contracted for the first time in six months in January. Commodities producers drove the country’s Bovespa stock index down following the news.

“Over the last few weeks we’ve heard not very good news on growth rate for China. China has been giving ambivalent signals. So when they give signals like the one they gave yesterday with PMI that dropped a little, our stock market loses some value as a result,” he told CNBC at the World Economic Forum in Davos.

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