São Paulo – Economist Eduardo Gianetti da Fonseca outlined three possible scenarios for Brazil’s economy following the presidential elections due in October this year. A professor at the Brazilian Capital Markets Institute (Ibmec, in the Portuguese acronym) and presidential campaign advisory team member for the political party PSB, which should confirm the former minister Marina Silva as its candidate, Fonseca delivered a lecture at the Arab Brazilian Chamber of Commerce’s offices in São Paulo last Tuesday (19th).
He foresaw similar macro- and microeconomic scenarios in case either opposition candidate wins, Silva or Aécio Neves (PSDB), and two possibilities in case president Dilma Rousseff (PT) is re-elected.
Gianetti said Brazil’s macroeconomic tripod – floating exchange rate, inflation targeting and primary surplus – is extremely fragile and the opposition will need to carry out corrective actions early on in their term in office, should they be elected, so as to reconnect with the economic scenario seen in Fernando Henrique Cardoso’s second term (1999-2002) and Luiz Inácio Lula da Silva’s first term (2003-2006).
“We will have adjustments for two or three quarters,” he said, referring to actions required in order for economic tripod to regain strength.
In the case Rousseff is re-elected, Fonseca said one possibility would be a learning curve, whereby the president would acknowledge her administrative mistakes and work on correcting them, moving back towards the tripod and creating the conditions for private sector investment in infrastructure. Another scenario would be the prevalence of a “I did so well they re-elected me” line of thinking and the ensuing “Argentinization” of Brazil, culminating in a financial crisis.
Fonseca gave an overview of the status of Brazil’s economy and explained the events that led to the current conjuncture. He remarked that the country remained virtually unscathed throughout the 2008/2009 crisis, after a period of growth, social inclusion, rising income, full employment and stable macroeconomics. “This illusion lasted until 2010,” he said.
According to him, the Brazilian economy is now faced with a worrisome combination of three issues: low growth rate, inflation near the top end of the target range and a current account deficit. “Whenever you have low growth, inflation should be well-behaved,” he said.
How has Brazil come to this situation? One factor, he said, was the change in external environment. “Global winds were blowing in our favour,” said Fonseca, citing high prices of the commodities sold by Brazil (like agricultural products and ores) in relation to the cost of products the country imports and the low interest-based monetary policy of developed countries, which caused an influx of capital to the country. Commodities prices have not plummeted, but have not kept rising either, and foreign money is now taking the opposite route.
Another factor he mentioned is Brazil’s fiscal situation, which harks back to the Constitution of 1988, when the State went from centralized to federative and states and municipalities became endowed with public sector attributions. Nonetheless, federal government spending increased instead of declining, and taxes were created under the guise of “contributions,” a gap left open by the Constitution. Brazil’s gross tax burden went from 24% to 25% of the Gross Domestic Product (GDP), in 1988, to a current 36%. “The gross tax burden grew linearly in every administration that followed,” he said.
A large portion of spending goes to Social Security, which currently soaks up 12% of the GDP, according to the economist. “This is an astronomical amount for a country that is still young.” This, according to him, explains Brazil’s low capacity for investing in both physical and human capital. According to him, the country cannot solve the Social Security issue without productivity gains. Each Brazilian needs to be more productive.
Another factor that has caused the economy to deteriorate, according to Fonseca, was the quality of economic policy. According to him, the transition from the FHC administration into Lula’s was conducted in utterly competent fashion. “It was a great, welcome surprise,” he says, noting that the economic tripod was maintained, with a floating exchange rate, an inflation targeting system and fiscal targets. “This pact would only be broken later on, in Lula’s second term, but more so during Rousseff’s administration,” said Fonseca.
Other factors which undermined the tripod, according to the economist, include a reduced primary surplus, as the government resorted to “creative accounting” such as delaying payments to meet the target, contracting debt on one end to transfer funds to another; the top end of the inflation target, which became the new mid-range, and government-controlled collective transport and fuel prices; and finally, intervention in the foreign exchange market to stave off price hikes.
According to him, the government started micromanaging, taking the place of the market and picking out sectors to be the “victors.” The economist believes this is a mistaken philosophy. Government measures must be horizontal, i.e. benefit the business environment across the board. This, says Fonseca, causes the market to become distrustful of regulation.
The event was presented and hosted by the Arab Chamber president Marcelo Sallum and former director Mário Rizkallah. It is part of the lecture cycle held by the organization on economics, culture, careers and other subjects.
*Translated by Gabriel Pomerancblum