Warnings have been sounded against complacency in fiscal and
monetary policy in Brazil.
Marcelo Carvalho, chief economist at Morgan Stanley in
São Paulo, yesterday called on policy makers to rethink
priorities, not to rely on the rising tax burden and set a
clear fiscal framework.
We see a strong rebound, but sustainability will be
much harder unless [there is action] on some structural
reforms. The risk is that policymakers confuse the two
things, Carvalho told Emerging Markets. If that
happened, the result would be lower growth in the long
There is not a major concern regarding debt
sustainability or solvency. The problem is more related to the
expansionist fiscal strategy. It may have negative implications
on growth eventually, says Carvalho.
In the short term, the current account deficit is a
more pressing issue. But in the long term, fiscal accounts are
the main concern for Brazil.
Fitch notes that the gross general government debt burden of
more than 70% of GDP will remain roughly 30% above
Mexicos, hammering home the need for Brazil to unwind its
The Brazilian government has defended its fiscal strategy,
saying that the net debt-to-GDP ratio will fall again after
reaching 43% last year. Paulo Bernardo Silva, Brazils
planning budget minister, has just announced sweeping budget
cuts of 21.6 billion reais ($12 billion) and a freeze on hiring
Finance minister Guido Mantega insisted in a recent
interview with Emerging Markets that we are
going to be on target fiscally.
But other observers have echoed Carvalhos concerns.
Liliana Rojas-Suarez, senior fellow at the Centre for Global
Development, said the fiscal position would be compromised if
expansion was not reversed. Investors have not yet priced
in the potential for a fiscal problem in Brazil. But its
there, she told Emerging Markets.
There are also concerns on the monetary policy front, where
rising inflationary pressures leave little doubt that Brazil
will soon start to raise its benchmark Selic rate.
Monetary policy tightening is necessary, Marcelo
Salomon, chief economist at Barclays Capital in São
Some members of the central banks monetary policy
council voted for an immediate hike at their March meeting, but
the majority (5 against 3) decided to keep rates at 8.75%.
This has raised some concern as economic activity picks up
and inflationary pressures intensify. The consumer price index
may reach 2% during the first quarter of the year, even though
market expectations are still within the upper range of the
inflation target (below 6%). If this trend persists, the
central bank will have to launch a new cycle of monetary
tightening next month.
Carvalho expects interest rates to end the year at 11%.