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Joaquim Levy, Brazil's new finance minister, favors market-friendly policies which run counter to President Dilma Rousseff's beliefs. (Photo: Wilson Dias/Agência Brasil)
Monday, December 1, 2014
Commentary

Will “CIA Levy” Be Able to Reform “Rousseff’s KGB”?

Brazil’s new finance minister faces uphill battle with President Dilma Rousseff.

BY LATINVEX EDITORS

Although markets have reacted favorably to the news that Brazil’s leftist president Dilma Rousseff has named market-friendly Joaquim Levy as her new finance minister, there is reason for a heavy dose of caution and skepticism about the actual effects this will have on Latin America’s largest economy.

“Choosing Joaquim Levy as finance minister in a PT government is like naming the CIA chief to head the KGB," said Aecio Neves, who almost defeated Brazil’s president Rousseff in October’s elections.

Levy, the chief strategy officer of Bradesco Asset Management and a former deputy finance minister, is considered to be a fiscal hawk and even acted as an advisor to Neves during his campaign.

Meanwhile, the Rousseff government has followed economic policies the past four years that have seen frequent state meddling to the detriment of local and foreign investors and led to a prolonged economic slowdown amidst rising inflation that has brought Brazil close to losing its investment grade.

Neves’ comment raises the question of whether Levy can actually succeed. A point Latinvex editors agree is highly valid.

"It is important to have that voice of reason in the team, but at the end of the day it continues to be Dilma Rousseff's government,” Alberto Ramos, a Goldman Sachs economist who knew Levy at the University of Chicago and later at the International Monetary Fund, told Reuters.

We don’t know what kind of agreement Levy made with Rousseff in terms of his autonomy to set economic policy, but we remain skeptical as to the Brazilian president’s change of heart.

In addition to her history of meddling, she is known as a critic of market economics.  Unlike her predecessor, Luiz Inacio Lula da Silva, who combined market-friendly policies with increased social spending, Rousseff has repeatedly attacked local and foreign companies.

After Spanish bank Santander pointed out the obvious, that investors favored a Rousseff loss, she publicly reprimanded the bank.  She told journalists on July 28 that Brazil shouldn’t “accept any level of institutional interference from any member of the financial system in electoral and political activity.”

After Santander – a major investor in Brazil – publicly apologized, Brazilian and foreign banks, brokerages and funds said they’re no longer willing to comment publicly about politics, with some citing the risk of government retaliation, Bloomberg reported.

During the campaign, Rousseff again attacked Brazilian bankers, this time through TV ads aimed at weakening support for her opponent Marina Silva, who had proposed granting autonomy to Brazil’s central bank.

“One ad…showed bankers in suits laughing as food vanished from the plates of a working-class family - a dramatization of what would supposedly happen if Silva's proposal for central bank autonomy became law,” Reuters reported.

Rousseff repeatedly attacked the idea of central bank independence, which most experts say is one key element necessary to keep inflation low.  During the campaign the Brazilian president claimed that such independence would make the central bank a "fourth power" and said that since the bank doesn't prioritize job creation, it would "indeed take food out" from workers' tables, according to The Wall Street Journal.

Central bank independence was actually one of the reasons Lula was so successful. Not only did Lula name a hugely respected private-sector banker – Henrique Meirelles – as the central bank governor, but he also gave him a de facto autonomy.  Even after Lula appointed Guido Mantega – who favored interventionist economic policies -- as finance minister, Lula typically sided with Meirelles in disputes between the two.

Rousseff broke with that tradition and sided wholeheartedly with Mantega in any dispute with the new central bank governor, Alexandre Tombini. As a result Tombini – who was widely respected when he was appointed in 2011 – has lost significant credibility as an effective central banker. His stated goals of fighting inflation have been undermined again and again by the Rousseff-Mantega policies of growing fiscal spending and investor-hostile policies.

While the appointment of Levy signals that Tombini may have an ally at Brazil’s Finance Ministry, another new appointment by Rousseff may undermine their alliance. Nelson Barbosa was named planning minister. And he has a reputation as a supporter of the Rousseff-Mantega interventionism.

Meanwhile, the appointment of Levy comes as Brazil’s state oil producer Petrobras  – Latin America’s largest company on the Latinvex 500 – is facing an unprecedented crisis after a massive corruption scheme was revealed.  Paulo Roberto Costa, former director of refining and supply at Petrobras, has told investigators about an illegal enterprise that involved skimming some $3.9 billion from Petrobras contracts and sharing the proceeds with corrupt officials and legislators, many from Rousseff’s Worker’s Party.

While Rousseff has stated that she supports a full investigation and has denied any knowledge of the scheme, the growing scandal has clearly weakened her for two reasons. First, she was chairwoman of Petrobras when the corruption took place. Second, Petrobras is the crown jewel of Brazil’s state companies, which Rousseff has repeatedly favored over private counterparts.

Meanwhile, Rousseffnomics has led to one of Latin America’s worst macro-economic performances this year. Brazil will likely see the worst economic growth since the 2009 crisis and the third-worst performance in the region after basket cases Argentina and Venezuela, according to a Latinvex analysis of new estimates from the International Monetary Fund (IMF). And Brazil’s estimated inflation will likely be among the four highest in Latin America, again making Brazil a laggard alongside countries like Argentina and Venezuela, according to another Latinvex analysis.

“Just as Lula is remembered as the president who brought 30 million Brazilians out of poverty, his heir could end up remembered as the president who brought them back to poverty,” said an editorial in Latin American business magazine America Economia.

So while Levy clearly has the right credentials, he just as clearly faces an uphill battle to bring Brazil back from the brink.


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