Guido Mantega and Henrique Meirelles featured as a potentially
risky double act in the eyes of many investors when the former
– erstwhile president of the National Economic and
Social Development Bank (BNDES) – was appointed to
succeed Antonio Palocci as finance minister in March.
Yet within six months, economic activity has picked up again.
Real interest rates have been falling against a background of
lower inflation. And unlike Turkey, Brazil has put up a brave
face in the wake of international market turbulence as it
emerged less vulnerable to external shocks, with its country
risk premium falling towards 200 basis points in mid-August.
"We paid back the IMF and the Paris Club. We did a clean-up of
the external debt," Mantega tells Emerging Markets. The
country’s net external public debt has been
eliminated. So has the dollar-indexed part of the domestic
debt, whose total amount has declined to little more than 50%
of GDP. The pillars of the fiscal discipline were kept in
place. Primary budget surpluses actually increased to over
4.25% of GDP (which is more than the previous government
delivered). GDP growth is now expected to amount to between 3%
and 4.5% this year (depending on sources – Mantega
himself forecast more than 4%), following 2.3% in 2005 and 4.9%
"Brazil is not an insecure and fragile country any more. It has
achieved an important leap forward in the past 20 years,"
Mantega says. "It used to be seen as a short-term country,
where you could make a quick buck and then go away. It is not
like this any more. Brazil is regarded as a country offering a
long-term perspective because it offers all the requirements
Brazil, argues Mantega, has now "turned the tables" –
once dependent on international capital, the country often
found itself unable to pay back and sought IMF assistance, but
now the economy has "bounced back" and has ended up a net
creditor after years of indebtedness. "The Treasury now has a
greater level of foreign reserves than debts," he observes.
Mantega points first to Brazil’s new-found foreign
trade prowess. This, he says, "means competitiveness without
the kind of artificial exchange rates that other countries that
I will not mention have (it is very easy to be competitive if
you have an artificial exchange rate)."
"Now, our trade balance is proportionately greater than even
China’s if we compare it to the total trade
transactions. This shows that Brazil has managed to insert its
economy in the age of globalization, and that we are
competitive in several markets. We have comparative cost
advantages. What was needed was a greater monetary stability,"
"Until the 1990s, Brazil was the country of inflation and
football; today we are neither the one nor the other!"
The battle against inflation, which threatened to run out of
control again four years ago, was won thanks to tough interest
rates measures by an inflexible central bank. "This is the
first time in recent history that the inflation rate will end
the year below the centre of the target [4.5%]," Meirelles
tells Emerging Markets. As he spells out the progress that has
been achieved (economic growth at around 4%, job creation in
the formal sector, increase in average income, net
international reserves at $67 billion, trade surplus of more
than $40 billion, etc.), the president of the central bank
stresses that "all that has been anchored on a current
inflation path, which is consistent with the inflation target,
and with expectations for 2007 which, in turn, are firmly
anchored at the 4.5% inflation target."
Adds Meirelles: "All the efforts are now paying off, and we are
able to show that Brazil is not different. Brazil reacts very
well to well-conceived and well-implemented policies. And it is
able to grow and prosper with low inflation and without
Before his appointment at the finance ministry, Mantega himself
was a fierce critic of the tight monetary policy led by the
central bank. He also favoured stronger intervention in the
foreign exchange markets to prevent what was seen as an
excessive and damaging appreciation of the Brazilian currency,
the real. Nevertheless, what has proved important to investors
is that both men have been able to work together and play in
the same team.
Certainly, Mantega and Meirelles are still very different in
style and content (the former is an academic who is close to
the domestic industry, while the latter has had a long career
in international finance). But they have somewhat managed to
iron out their differences. Mantega now goes as far as saying
that "fiscal stability and monetary stability are neutral". He
is also closer to President Lula’s
Workers’ Party (PT), while Meirelles was elected a
federal deputy for the Social Democratic Party (PSDB), of
former president Fernando Henrique Cardoso, in October 2002.
(As Lula appointed him to the central bank shortly after, he
never actually took his Congressional seat.)
Mantega has never been a great fan of the idea of central bank
independence, and there has been no progress towards it during
the past six months. But at the same time, Meirelles and his
directors continued to enjoy the same degree of operational
autonomy as in the past.
Meanwhile, Mantega is keen to talk up the
government’s social credentials. "We have
implemented an industrial policy and a social policy that
previous governments did not have ... These are new elements;
there is more credit available for small and medium-sized
businesses," he says.
The overall level of credit, which has long been very low in
Brazil, has already been boosted to 33% of GDP, and Mantega is
adamant that it can reach 50% of GDP during the forthcoming
presidential term. The target, which has become a sort of
political directive, is also defended by the budget and
planning minister Paulo Bernardo Silva. At the same time,
Mantega has also endorsed orthodox goals, such as the
elimination of the nominal budget deficit by 2010.
Uncertainties regarding the international environment are not
likely to spoil the party either, adds Meirelles. "There are
some risks but no clear signal that there is any kind of
serious crisis looming ahead of us. The economy is showing some
signs of slowing down somewhat, but there is no clear signal of
very serious crises ahead," he says.
Not all of Brazil’s financial community agrees,
however. Caio Megale, at local hedge fund Maua Invest thinks
Mantega’s economic forecast is untable: "[The
figures] are not realistic: they are based on far too benign
projections. It’s impossible for them to
materialize in the short term. There are a lot of bottlenecks
(infrastructure, education, red tape, labour laws), there is no
mortgage market, too much fiscal deficiency (mainly the social
security deficit)," he says, "You’d really need to
have widespread welfare reform to make it happen."
Jan Jarne, managing partner at Invest Partners, a local
investment-banking boutique in Sao Paulo is also doubtful about
Mantega’s forecast of 5% real interest rates.
"It’s too simple a statement," he says. "Real
interest rates of 5% would be a reasonable level to expect when
compared with rapidly emerging countries, but this is easier
said than done. Also, actual rates for borrowers are
significantly higher because of the high spreads."
All in all, Mantega and Meirelles insist that the Lula team is
united. "We are cooperating fully; we have a very good and
productive relationship. We have just issued a profound reform
of the foreign exchange regulations [allowing exporters to open
an account abroad to deposit up to 30% of their foreign sales
receipts]. It was a joint effort ... We are very happy with
such a productive working relationship, not only between the
central bank and the finance ministry but [also] between
Mantega and myself," says Meirelles.
Mantega also denies any frictions. "We are part of the same
group ... the central bank and the finance ministry work in
perfect harmony. Each has its duties, and we work together
within the national monetary council. Every week, our
respective teams have lunch together to deal with issues of
Nevertheless, Meirelles has had to put up with formidable
opposition to his tough monetary policy, especially from within
government circles (the so-called friendly fire). Now that
economic policy has indeed started to deliver the goods, both
the finance minister and central bank chief can take their
share of the credit. They may never form a dream team with the
same Wall Street appeal of past famous couples such as Pedro
Malan and Arminio Fraga or even Antonio Palocci and Henrique
Meirelles himself, but financial investors all agree that the
progress achieved in the last few years has been impressive.
Both Mantega and Meirelles – respectively triumphant
and measured in tone – predict a bright future for
Brazil’s economy, no matter what happens in the
external environment. "Today we have economic growth without
any distortion in the public accounts. This is a unique
combination in the country", says Mantega, who predicts Brazil
will soon break the threshold of 5% economic growth and will be
able to join the club of fast-growing emerging markets.
"If Brazil grows at more than 5% during 10 years, this will
lead to a deep transformation of the Brazilian society. We will
indeed have a sound and more competitive economy and a fairer
society," Mantega says. Meanwhile, Meirelles is more considered
(although he refuses to be called "cautious"):
"It’s an opportunity for Brazil to enjoy the
benefit of a stable economy for the first time in many decades,
with an increase in investment and eventually an elevation of
the potential GDP," he says. "We’ll keep working
towards low inflation, keeping a primary surplus and
implementing the necessary structural reforms to improve
efficiency and boost productivity."
In the meantime, wary investors will keep a very close eye on
the level of public spending and the tax burden in next few