Brazil's economy, Rough weather ahead
The mistakes Dilma Rousseff made during her first presidential term mean her second will be stormy
WHILE Dilma Rousseff prepared to be sworn in for a second term as Brazil’s president on January 1st, the skies over the capital, Brasília, were forecast to be clear. But the outlook for the next four years is gloomy. Her daunting to-do list includes repairing ties with America, damaged by the revelation in 2013 that its spies had tapped her phone calls. Deforestation in the Amazon region is rising after a decade of decline, and the worst drought on record threatens to bring energy and water rationing to the industrial south-east. Preparations for the 2016 Olympics in Rio de Janeiro risk a reprise of the deadline- and budget-busting run-up to the 2014 football World Cup, which Brazil also hosted. Ms Rousseff’s left-wing Workers’ Party (PT) and its allies are embroiled in a corruption scandal involving Petrobras, the state-controlled oil giant, though so far she is personally untainted (see article).
But it is the economy where the storm-clouds are stacked highest. The end of the commodity supercycle means falling prices for Brazilian exports of soyabeans, iron ore and, most recently, oil. And the policies Ms Rousseff pursued during her first term have proved disastrous. A combination of macroeconomic laxity and microeconomic meddling, intended to boost growth, merely undermined public finances and her credibility. GDP rose by just 6.7% during her first four years. Her biddable Central Bank governor, Alexandre Tombini, and finance minister, Guido Mantega, cut interest rates and let rip on public spending even as inflation rose and tax receipts slowed. If her second term is to be any better, she will need to undo much of what she did in the first.
Ms Rousseff has made a start by recruiting Joaquim Levy, a hawkish banker, to replace Mr Mantega, and Nelson Barbosa, a respected economist, to the planning ministry, where he will oversee public investment. Mr Tombini will remain at the Central Bank, but has clearly been told to take the inflation target of 4.5% seriously; since Ms Rousseff’s victory in October, the benchmark interest rate has been raised from 11% to 11.75%. New agriculture and trade ministers with ties to farmers and industry signal a truce with the maligned private sector. The foreign ministry, too, is expected to get a more trade-friendly boss.
Mr Levy, in particular, has his work cut out. He has promised a primary budget surplus (before interest payments) of 1.2% of GDP in 2015 and 2% in 2016 in order to avoid Brazil losing its investment-grade credit rating. But under Mr Mantega opaque and inefficient subsidies to energy, transport and credit ballooned. And half of all primary public spending (including on pensions) moves in step with the minimum wage, which is to rise by around 2.5% in real terms in 2015 under a multi-year formula that links it to past GDP growth. This means that Mr Levy must find savings of 2.1% of GDP elsewhere. A surplus of 0.7-0.8% is more plausible, thinks Mansueto Almeida, a public-finance expert.
Even hitting that lower target will mean cutting public investment and raising taxes—thereby making a return to growth even harder to achieve in the short term. Brazil’s tax burden, already at 36% of GDP, is far higher than that of other middle-income countries. And its big construction firms, which are alleged to have bribed Petrobras for contracts, are likely to get caught up in legal proceedings and thus barred from public work. That puts at risk planned infrastructure projects budgeted at 870 billion reais ($325 billion), including some needed for the Olympics. After a 7.2% drop in investment in 2014, Itaú, a bank, expects investment to be flat in 2015. Analysts have duly slashed growth forecasts for 2015 from 2.5% a year ago to 0.8% or less. Some predict an outright recession.
Mr Levy’s task should become slightly easier in 2016, when, thanks to stalled GDP growth, spending linked to the minimum wage should merely keep pace with inflation. Ms Rousseff’s, by contrast, is likely to become harder, thinks João Castro Neves of Eurasia Group, a consultancy. The PT’s left-wingers and their sympathisers in trade unions and social movements despise Mr Levy, whom they call “Scissorhands”. The party’s allies in government are in a mutinous mood: in December 35 of 71 congressmen from its biggest coalition partner refused to vote with the government to revise this year’s unattainable primary-surplus target of 1.9% (though the measure passed anyway). The Petrobras affair, which the opposition is exploiting with gusto, will further deplete the president’s already diminished political capital.
Austerity will also hit her popularity in the country at large. Petrol prices have already gone up; electricity and public transport are next. The most recent plan to raise bus fares in big cities, in June 2013, sparked the biggest protests in a generation, and was quickly dropped. Any fiscal and monetary adjustment big enough to restore public finances is sure to push up the jobless rate, which is now close to a record low of around 5%.
Ideally, Ms Rousseff will let Mr Levy snip away, and use the Petrobras scandal to revitalise the ailing oil and construction industries by opening them up to foreign competition and dropping onerous (and graft-inducing) local-content rules. But having promised Brazilians that belt-tightening would be painless, she may unbuckle at the first twinges of discomfort. Even if she does not, her new-found appetite for reforms will not be matched by her capacity to accomplish them.
The Economist |