Fiscal pressure mounts on Brazil

09/10/2010 | Thierry Ogier

Brazil has come under renewed pressure from the IMF and the World Bank to adjust its fiscal policy – but the country’s officials are standing firm

Meirelles: caution

Meirelles: caution 
The Central Bank president suggested in Washington yesterday that caution would be adopted in shifting the fiscal policy of Latin America’s largest economy, which faces the second round of presidential elections on 31 October and a new administration taking over on 1 January next year.

“We now have a new government that will certainly be in office on 1 January, 2011. It is important that we all keep an optimistic posture, regardless of expectations, so that the new government can announce the policies that it deems more adequate,” Henrique Meirelles, president of the Brazilian central bank, said.

Mereilles’s stance is in sharp contrast with the tone of previous declarations from the international financial community. “We would encourage the next Brazilian administration to promote some fiscal adjustment,” said Nicolas Eyzaguirre, the IMF’s Western hemisphere director in an interview with Emerging Markets.

“Given the strength of the cycle and the strength of domestic demand, it would be advisable that they seize the opportunity to have somewhat bigger primary budget surpluses, and reduce their debt level, as well as lengthening the maturity of public debt, given the very liquid financial markets.”

The government has a primary budget surplus target of 3.3% of GDP (before interest payments), but it is currently running at some 2% of GDP in annual terms and said it will resort to creative accounting mechanisms to achieve its targets. Concerns over overheating are also mounting, as the IMF forecasts GDP growth to reach 7.5% this year (and 4.1% in 2011).

“The output gap is closing fast in countries like Peru and Brazil,” Eyzaguirre said. “In Brazil, there is even a debate that the output gap has not only been closed but it is now slightly in excess.”

Furthermore, Augusto de la Torre, the World Bank’s chief Latin America economist, has said the policy mix was wrong, as it placed an excessive burden on monetary policy. The Brazilian Central Bank has suspended its tightening cycle a few weeks before the elections, but private analysts expect it to resume tightening this year.

The central bank has also been accused of being behind the curve. John Welch, chief strategist at Macquarie, said : “I am mystified at the central bank’s misinterpretation. They started up [the tightening cycle] behind the curve, and now they are delaying it. Dilma Rousseff [the favourite to win the presidential election] has said she does not think a fiscal adjustment is necessary,” said.

Meirelles said this is a “legitimate” debate. “A lot of people say [the central bank] is actually ahead of the curve, that it raised interest rates too much. Others think it was not enough. This is a legitimate discussion because the global economy is quite unstable.

“Forecasts have proved to be quite wrong, because the economy has been submitted to a series of exogenous shocks.

“The Brazilian central bank has a record of maintaining stability and inflation on target over the past seven years, and certainly will it maintain this record and is committed to deliver inflation at the core of the target in 2011 [4.5%],” Meirelles said.

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