by As a country, Brazil has many things going for it: a large economy, a young population, and plentiful natural resources. But if it is to enjoy the economic growth those assets can provide, it needs to make structural reforms that can help close budget deficits, slow the growth in public debt, and remove obstacles to economic growth. Former presidents and central bankers, economists and industrialists, all agreed at the Credit Suisse 2016 Latin America Investment Conference (LAIC) that for Brazil to make the changes necessary to re-ignite growth, Brazilian officials must first overcome the political infighting, scandals, and public disillusionment that have brought it to the economic crossroads it sits at today. Fernando Henrique Cardoso – president of Brazil from 1995 to 2003, and a keynote speaker at the LAIC – knows a thing or two about tough reforms. As Finance Minister from 1993 to 1994, he was the main architect of the Plano Real (or “real plan”), a successful effort to stop hyperinflation. In 1999, after the Asian financial crisis, Cardoso’s government adopted a so-called “tripod” of policies that stabilized the economy: setting inflation rate targets, floating the currency, and running budget surpluses.
Topics:
Ashley Kindergan considers the following as important: Re-igniting Growth in Brazil
This could be interesting, too:
Credit Suisse writes Brazil’s Fiscal Imbalance: A Way Forward
Ashley Kindergan writes Unlocking Brazil’s Long-Term Growth Potential
Credit Suisse writes VIDEO: Global Growth, Commodities, and the Lessons of Brazil
As a country, Brazil has many things going for it: a large economy, a young population, and plentiful natural resources. But if it is to enjoy the economic growth those assets can provide, it needs to make structural reforms that can help close budget deficits, slow the growth in public debt, and remove obstacles to economic growth. Former presidents and central bankers, economists and industrialists, all agreed at the Credit Suisse 2016 Latin America Investment Conference (LAIC) that for Brazil to make the changes necessary to re-ignite growth, Brazilian officials must first overcome the political infighting, scandals, and public disillusionment that have brought it to the economic crossroads it sits at today.
Fernando Henrique Cardoso – president of Brazil from 1995 to 2003, and a keynote speaker at the LAIC – knows a thing or two about tough reforms. As Finance Minister from 1993 to 1994, he was the main architect of the Plano Real (or “real plan”), a successful effort to stop hyperinflation. In 1999, after the Asian financial crisis, Cardoso’s government adopted a so-called “tripod” of policies that stabilized the economy: setting inflation rate targets, floating the currency, and running budget surpluses. To pass tough fiscal reforms now, he said, politicians must pull together to come up with a similarly ambitious-yet-achievable plan and convince churches, academics, union leaders, and business leaders that drastic change is necessary. “We have to generate a new consensus,” Cardoso said. “Nobody can change a country if we don’t have a convergence of ideas.”
Brazil has run primary deficits (shortfalls in government revenues, without factoring in interest payments on debt) several years in a row, with the result that its public debt has shot up from 51.7 percent of GDP in 2013 to 65.7 percent in 2015—and is expected to hit 77 percent by 2017. Credit Suisse economists say Brazil needs a primary surplus of 5 percent of GDP in 2016 and 4 percent in 2017 to stabilize debt levels, but instead, they predict deficits of 1.4 percent of GDP in 2016 and 1 percent the following year. Public debt will likely continue rising until 2019.
Both S&P and Fitch cited the country’s deteriorating fiscal position as the primary factor in their decisions to downgrade Brazil’s sovereign debt rating below investment grade in the fall of 2015. Moody’s echoed them in December, when it announced it was considering a downgrade, a step most analysts expect the agency to take in 2016. But just as nerve-wracking as the debt and deficit numbers, the raters noted, were the fractious politics of Brasilia, the country’s federal capital. Economist and credit ratings expert Norbert Gaillard said countries that have quickly regained their investment-grade status have come up with clear road maps for dealing with their fiscal imbalances. That will be an uphill battle in Brazil, but not an impossible one.
The measures for which politicians need to build support – cutting spending and raising taxes – aren’t easy propositions in Brazil, where the tax burden is already high and a large proportion of government spending is non-discretionary. Public opinion of the government complicates things further. Recent polls indicate only 8.8 percent of Brazilians approve of current President Dilma Rousseff’s government, and some 70 percent disapprove. As recently as early January, hikes in public bus fares set off public protests in Sao Paulo. “If you cut subsidies, the people who receive subsidies will be against the cuts,” said Henrique de Campos Meirelles, former president of Brazil’s central bank, at the LAIC. “Every measure has a cost. To be able to do something we need some leadership to mobilize society and say, ‘The costs will have to be paid by someone.’”
Recent political controversies make the task of rallying public opinion more difficult. A corruption scandal known as “Operation Car Wash” has dogged elected officials for the past year and a half, and President Rousseff is facing impeachment proceedings, accused of making public finances look better than they were during her 2014 re-election campaign. The person who initiated the impeachment, Chamber of Deputies Speaker Eduardo Cunha, was indicted in August 2015 on money laundering and corruption charges related to Operation Car Wash. The governing coalition – of which Cunha is a member – is splintering under the strain. More than 100 deputies out of a total of 513 have left the coalition, according to Credit Suisse.
Though the government cut spending by 104 billion reais ($25.7 billion) last year and has proposed additional cuts in 2016, experts at the LAIC said the real problem that politicians need to address is Brazil’s non-discretionary spending. Politicians began increasing social spending when commodity prices were rising, and social spending has continued to rise 3 to 4 percent a year since 2012, according to Mansueto Almeida, a senior researcher at the Brazilian Institute of Applied Economic Research (IPEA). Welfare, employee salaries, and social security comprise a combined 77 percent of the annual budget, according to Credit Suisse, and many of those benefits are indexed to inflation, which is running at almost 11 percent.
Tax increases are also probably necessary to right the fiscal ship, though Almeida points out that Brazil’s tax burden is already 34 percent of GDP, much higher than in other developing countries. Henrique Meirelles said that the government could make tax hikes more palatable by making them temporary, but they’d also have to put forth a credible plan for ending the crisis to assure taxpayers that the measures would, in fact, end. Brazil can get past its current problems, but to do so its government officials first have to reach compromises among themselves and then convince the public that putting off the pain of tough structural reforms will only delay their country from realizing its considerable economic potential.
Photo by Antonio Scorza courtesy of Shutterstock.com