Theres a word for it: ufanismo a
unique blend of euphoria and nationalism that has long
characterized a key part of the Brazilian psyche.
These days, gatherings of Brazils business and
government leaders is as good an opportunity as any to witness
ufanismo alive and well less than a generation after the
Brazilian miracle of the 1970s ended in
hyperinflation and tears a decade later.
The locals have plenty of reasons to celebrate:
Brazils economy defied the worst expectations on the way
into the global crisis, swiftly bottoming out of a short-lived
recession, and is now poised for solid expansion; the
longer-term picture is made brighter still by vast new oil
reserves set to be pumped from ultra-deep waters in the
Meanwhile Brazil is positioning itself as a superpower in
the making, spending billions of dollars on fighter planes,
helicopters and a nuclear submarine to step up its defence
arsenal. The 2014 football World Cup and the 2016 Olympics,
which Brazil will host, seem like the icing on the cake. Why
should they resist a sense of triumphalism?
The president of the central bank, Henrique Meirelles
a key player in calming anxious foreign investors during past
crises reflects on the mood: Brazil is no longer
the country of frustrated desires; we have become a country
that delivers the goods, he said recently.
The country has come a long way: after a series of recurrent
crises over the past 20 years, the Latin American giant is now
widely praised for its macroeconomic performance and management
in the midst of the global storm. Following GDP growth of 0.2%
in 2009 and a 2% rebound in the last quarter of that year (in
annual terms), it has emerged as a strong and stable force in
the region with good economic growth prospects in 2010.
We will be able to sustain annual GDP growth of more
than 5% for the years to come because our macroeconomic
fundamentals are balanced, Guido Mantega, finance
minister, tells Emerging Markets in an interview.
Mantega has forecast a 5.2% expansion this year, while the
central bank has a 5.8% estimate.
Others go even further: Goldman Sachs Jim
ONeill, the father of the term Brics (Brazil, Russia,
India and China) and a perennial emerging markets bull, and
former economy minister Antonio Delfim Netto both forecast 6%
GDP growth in 2010.
Yet not everyone is convinced. Fears are rising over the
still fragile global economy, where a double dip recession
would leave few unscathed. Equally, sovereign risk in the
eurozone could spill over into global markets, with severe
knock-on effects for even the better-placed credits.
There is no reason for euphoria, says William
Eid, a finance expert at the Getulio Vargas Foundation (FGV), a
research institute in São Paulo. If it gets worse,
we are going down together as well. No one wants to acknowledge
these risks; nobody wants to scare anybody, he says.
Domestically, there are also pressure points. Twin deficits
have resurfaced, and the gaps are larger than expected. The
foreign trade surplus is narrowing while the current account
deficit is widening.
On the fiscal front, the government has shown little
intention of changing its expansionary fiscal policy apart from
phasing out a series of tax breaks that fuelled the consumer
market in times of crisis.
The markets turned a blind eye when the government decided
to lower its primary budget surplus target of 3.3% of GDP to
2.5% of GDP in the middle of the crisis and eventually ended
2009 with a surplus before debt interest payment
of 2.1%. The government also used some creative accounting to
reach the headline figure of 2.5%.
Yet finance minister Mantega is adamant that the government
remains committed to return to a surplus of 3.3% of GDP in
2010. We are going to be on target, because the country
is fiscally responsible and has little external
vulnerability, he says. If needed, we will have to
put a lid on expenditures, spending and consumption to achieve
this fiscal outcome.
Ilan Goldfajn, chief economist at Itau Unibanco in
São Paulo, gives the governments fiscal policy
some credit. There is no need to alter the target:
its feasible, he says.
Some analysts, including at the IMF, are sceptical. But
Mantega says he has proved his critics wrong in the past and
maintains the government will stick to fiscal discipline before
and after the October elections. Our nominal budget
deficit will be one of the lowest among the G-20 in 2010 [2% of
GDP], and our target is to zero it by 2012, he says.
But Brazil ended 2009 with a relatively high budget deficit
of 3.3% of GDP. The net debt to GDP ratio stood at 43%, up more
than five percentage points on 2008 (37.8%), although it was
down to 41% this January.
Moreover, the level of gross public debt is much higher.
This includes Treasury loans to the Brazilian development bank
(BNDES), which are not included in the net debt calculation. In
2009, the BNDES received 100 billion reais ($44 billion) and is
due to receive an extra 80 billion reais this year. As there is
a difference between the Treasurys funding rate (the
benchmark Selic rate 8.75% per year) and the BNDES
long-term rate (the so-called TJLP stands at 6% per year), this
is likely to hit the primary budget performance.
The governments exit strategy does not address this
concern and reiterates the strategic importance of boosting the
BNDES lending capacity to encourage investment,
especially in infrastructure. The BNDES has been our main
anti-crisis weapon, says Mantega. What matters is
the net debt, which is well below the standards of other
countries. But the gross debt will fall too.
Credit rating agency Fitch is among those that have
identified a weakness here. Brazils gross general
government debt burden of over 70% of GDP will remain
approximately 30 percentage points above Mexicos,
underscoring the need for Brazil to embark on fiscal
consolidation as the economic recovery takes hold, says
Shelly Shetty, director at Fitch Ratings sovereigns group.
So far, Brazilian policy-makers have brushed off such
concerns. Even the market friendly Meirelles has gone a long
way to acknowledge that the BNDES is part of
Brazils strategy to boost investment.
Meanwhile, domestic demand has remained strong. State
controlled banks, such as Banco do Brasil, have sustained
credit activity, which is now equivalent to 45% of GDP a
record high in Brazil. Other financial institutions have
followed suit, and most have registered healthy profits. In
2010, credit activity is expected to expand by a further 21%
according to Febraban, the Brazilian banking association.
The IMF view, however, in the words of one official, is:
There will be a need to cool things down a bit.
Indeed, some feel that the consumer boom, which has already led
Brazil to become the worlds third largest market for
computers and fifth largest for cars, may not last forever.
Credit, retail and wages are growing faster than the
long-term growth trend, says Meirelles. The central bank
has already restored most of the banks reserve
requirements that it had lifted to restore liquidity during the
crisis (71 billion reais out of around 100 billion reais).
But its exit strategy certainly includes a new round of
monetary tightening, as market expectations have already put
the 2010 annual inflation rate above the official target of
4.5%. Itau Unibanco says the consumer price index for the first
quarter may reach 2%. The central bank is going to
increase base rates; there is no doubt about it, says
former finance minister Mailson da Nóbrega.
The level of public spending has remained an issue which is
at the heart of the current electoral campaign. Former central
bank president Arminio Fraga has long argued that a more
balanced fiscal policy would alleviate the pressure on monetary
policy. My recommendation is not to step on the brake,
but rather to take the foot off the gas pedal a little,
said Fraga, chairman of the BM&FBovespa exchange, late last
year. Dont put so much pressure on monetary policy
and interest rates and as a result on the exchange
The external accounts are expected to deteriorate a
thorny issue given the uncertainty surrounding the global
economy. Last year, the situation improved, but Brazil
registered a gap of $24.3 billion or the equivalent of 1.5% of
GDP, down from 1.7% of GDP in 2008. Such modest deficit levels
would be covered without difficulty by strong inflows of
Nevertheless, the strong economic recovery underway in
Brazil points to a sharp deterioration in the current account
this year (in excess of 3% of GDP), due to a strong rise in
imports as well as profit and remittances, in line with an
expected rebound in foreign direct investment.
The government expects FDI flows to reach $45 billion this
year, but this may not be enough to finance the current account
gap, and Brazil would again become dependent on short-term
capital flows. The current account deficit would be a
problem if we did not have the foreign currency reserves,
says Mantega. We knew that there was going to be an
increase in the deficit because the Brazilian economy keeps on
growing and importing, while the international economy is
contracting. This leads to a discrepancy. Our trade balance got
Now, as the international economy recovers and with
changes in exchange rates, our exports are going to grow again,
and this deficit is going to be reversed in the next two
years, he says.
Nevertheless, in spite of strong foreign currency reserves
around $240 billion a new bout of volatility in
the international capital markets may expose Brazils
vulnerability once more.
Paulo Nogueira Batista, an IMF executive director for Brazil
and other Latin American countries who is close to Mantega,
thinks increased dependency on the markets moods is
undesirable. True, the recent depreciation of the real in the
foreign exchange market since the beginning of the year may
point to a more benign scenario. But despite this, Nogueira
advocates more restraint on the fiscal and the credit fronts,
as well as stronger capital controls.
Mantega, who introduced a 2% tax on foreign fixed income and
portfolio investments last October, says there is no need for
additional measures. He called the IOF (financial transactions
tax) a moderate move that changed the somewhat irrational
course of the market and said the real is now
floating with less volatility.
We never changed the rules on capital exit, says
Aloizio Mercandante, a senator from the presidential PT party
and one of Lulas financial advisers. Capital
controls are not part of our agenda.