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CHANGE OF GUARD Joaquim Levy and Guido Mantega. (Photo: Valter Campanato/Agencia Brasil)
Monday, December 8, 2014

Brazil Economy: Unclear Levy Impact

Experts disagree on what impact Joaquim Levy will have as Brazil’s next finance minister.


Inter-American Dialogue

Brazilian President Dilma Rousseff named Joaquim Levy, the head of Bradesco Asset Management and a former treasury secretary under her predecessor, as finance minister at a time the country is facing slowing growth, rising inflation and investor skepticism. Why did Rousseff pick Levy for the position, and what does his nomination as well as the appointment of Nelson Barbosa as the country's planning and budget minister and the continuation of Alexandre Tombini as central bank president say about the types of economic policies that can be expected during Rousseff's second term? What does Brazil's next economic team need to prioritize?

Joel Korn, president of WKI Brasil: Joaquim Levy's appointment was driven by the need to restore credibility and the confidence of investors, the business community and consumers at a moment that a significant shift in economic policy is critically needed. Pressed by a stagnated economy and facing continued deterioration of macroeconomic fundamentals along with a far more assertive opposition, President Rousseff yielded to a pragmatic and responsible decision to pursue needed adjustments. The new economic team is fully behind a credible fiscal adjustment, aiming at a gradual increase of the primary surplus in the coming years. This will be essential to reduce the pressures on public debt and strengthen the central bank's monetary actions toward reducing inflation. As always, good execution is paramount. It is a major undertaking, particularly in a country that has yet to implement long-overdue structural reforms to enhance competitiveness and still remains largely dependent on commodity prices. Bold actions and tough decisions will be required on the fiscal front to cut expenditures and ensure quality resource allocation trade-offs to mitigate the inevitable effects on employment and social programs. While it is still early to predict how much time an economic recovery will take, it is reasonable to anticipate a very difficult and challenging horizon for the next 24 months. Therefore, consistency and transparency of the implemented measures will be essential to facilitate renewed confidence from the private sector in investing and resumption of economic growth, of foremost importance to strengthen fiscal revenues. Just as important will be further partnerships with the private sector in critical infrastructure project investments. Levy, Barbosa and Tombini are very well-qualified for the task and should form a credible and a cohesive team, capable of promoting a more constructive dialogue with the local and foreign financial and business communities. Although there is skepticism about the degree of support from President Rousseff for the painful, but necessary adjustments, I am guardedly confident that such a support will be forthcoming.

Welber Barral, senior consultant at Barral M Jorge Consultores Associados and former Brazilian foreign trade secretary: The appointment of President Rousseff's new economic team is a clear indication that her second-term government is willing to execute important readjustments to the economy, especially by introducing a stricter fiscal policy and pushing for more transparency in public accounts. This move is expected to increase the country's credibility and recover growth after a recent period of weak economic performance. The nomination of Joaquim Levy--an economist with an orthodox and pragmatic profile--as the next minister of finance proposes to bring more discipline to government accounts. As a former treasury secretary under President Lula, Mr. Levy is used to Brazil's fiscal policy and has already highlighted the establishment of a realistic primary surplus target of 1.2 percent of the country's GDP. In line with Mr. Levy's prospects, Nelson Barbosa, the next minister of planning and budget, promised to improve the efficiency of public spending, while Alexandre Tombini as central bank president will struggle to control inflation. Achieving these goals will be key to boosting Brazil's credibility with investors, increasing productivity and rebalancing the economy to continue the consolidation of social advances. President Rousseff's new economic team will face multiple challenges to adopt these readjustments in economic policies, but the move will be crucial to ensure the country's future social and economic growth.

Marcos Casarin, economist in the macroeconomic forecasting team at Oxford Economics in London: The appointment of Mr. Levy as finance minister came as a surprise for those who followed the presidential campaign in the second half of the year, as Ms. Rousseff was re-elected promising no change in economic policies. We at Oxford Economics welcome the return of Mr. Levy to Brasília as he boasts the credibility and competency to reorient macro policies in Latin America's largest economy. The only reason behind Ms. Rousseff's move toward pragmatism and orthodoxy is the sole exhaustion of the economic model that outgoing Finance Minister Guido Mantega put in place beginning in 2009--the so-called 'new economic matrix.' Such policies, based on ad-hoc tax breaks for consumers, state control of energy prices, lavish public spending and complacency with inflation, not only failed to boost economic growth and investment, but also left the country vulnerable to a sovereign rating downgrade, which could potentially escalate into a severe confidence and debt crisis. As such, Rousseff's Workers' Party came to the realization that without economic stability, its chances to stay in power beyond 2018 would be completely wiped out; hence, the return to the successful model based on fiscal austerity, inflation targeting and a floating exchange rate. The priority for Messrs. Levy, Barbosa and Tombini should be to restore business and investor confidence, which now sit at their lowest level since the 2008-09 crisis. For that, they need to give transparency to Brazil's public finances (that is, by ending creative accounting) and successfully execute their credible mid-term fiscal consolidation plan worth 0.8 percent of GDP per year in the next three years. Tighter fiscal and monetary policy in the short term would also help to bring inflation back to the 4.5 percent target earlier, causing long-term interest rates to fall, thus fueling private investment and boosting potential output growth. 

Samuel George, project manager at the Bertelsmann Foundation in Washington: Fiscal policy is at the heart of the current Brazilian malaise. From 2004 to 2014, government spending leaped from 36 percent of GDP to nearly 42 percent of GDP, financed in part by increasing revenues from the global commodity boom. This level of spending generally exceeds that of other upper-middle-income economies, but it was not alarming as long as growth was strong and Brazil's terms of trade remained robust. But now, revenues have tapered and spending has not. Fiscal results for 2014 point to an all-but-complete erosion of the primary surplus, and the country has missed its own fiscal targets since 2011. In our recent paper 'Five Steps to Kickstart Brazil,' Cornelius Fleischhaker and I argued that President Rousseff needed to send a strong message early in her second term that she was dedicated to fiscal consolidation. The appointment of Joaquim Levy, with his reputation as a fiscal hawk, could represent just such a message. Similarly, the appointment of Nelson Barbosa as planning and budget minister suggests a return to Lula-era policymakers that had Brazil on more stable fiscal ground. Cuts to public spending will not be easy. In 2013, a modest hike in bus fares ignited protests that brought millions to the streets. Rolling back subsidies could cause similar disquiet. But Mr. Levy has a track record that suggests he could do it. The real question is whether President Rousseff will let him. 

Juan Jensen, CEO of Tendências Consulting: The choice of Levy as finance minister means that the economic policy of Rousseff's second term will be different from that of her first term. In Rousseff's first term, the government implemented a 'new economic matrix,' which was composed of fiscal stimulus, monetary stimulus and a forced depreciation of the Brazilian currency, in an effort to increase growth. But this policy brought less growth and high inflation. So the government changed the monetary and currency policies, mainly because of the acceleration of domestic prices. We are now facing a second cycle of monetary tightening, and the central bank is trying to avoid more depreciation of the Brazilian currency, selling a lot in futures markets. But there is still no change in fiscal policy. Brazil is facing a deficit in the primary surplus, the first since 1999, and is observing an increase in public debt. So it is time to change fiscal policy and restore the tripod of macroeconomic policy, composed of monetary policy focused on the center of the inflation target, a free-floating exchange rate and a fiscal policy that reduces debt over time. This is the priority of Levy and the whole economic team. It is important to note that all of these changes are not because of the conviction of President Rousseff, but are going to be implemented because the scenario without these adjustments, in which Brazil loses its investment-grade status, would be much worse.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor
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