New Brazilian finance minister pledges to restore fiscal balance
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The Chicago-trained former Treasury secretary said the primary fiscal surplus, the budget surplus before interest payments, would be gradually returned to the equivalent of at least 2 per cent of gross domestic product per year.
“The immediate objective . . . is to establish a target for the primary fiscal surplus for the next three years that is compatible with the stabilisation and decline of gross public debt in relation to GDP,” he said.
Mr Levy, who is seen as a fiscal hawk in contrast to predecessor Guido Mantega, who oversaw a generous and prolonged fiscal stimulus, said there would be no immediate “package” of measures.
But he said the government would aim for a primary surplus next year of 1.2 per cent followed by at least 2 per cent in 2016.
“It is well understood that to achieve this trajectory in relation to public debt to GDP, the primary surplus of the consolidated government should be at the minimum 2 per cent of GDP for a prolonged period,” he said.
Answering concerns that he would have sufficient independence from President Dilma Rousseff, who has been criticised for interventionism on the economy, Mr Levy said he believe that there was sufficient “maturity” in the team to handle such issues.
“Autonomy has been given. The objective is clear . . . we will see as the days play out how things go,” he said.
Ms Rousseff also announced that former Treasury secretary Nelson Barbosa would take over as planning minister from Miriam Belchior, overseeing the country’s major infrastructure projects, and central bank head Alexandre Tombini would continue in his job.
When speculation began to gather steam last week that Brazil’s centre-left government would appoint Mr Levy, opposition leader Aécio Neves joked that it would be like appointing a CIA chief to head the KGB.
Mr Neves, the pro-business PSDB party leader who narrowly lost an election to Ms Rousseff and her Workers’ party, or PT, last month, may not be far off the mark.
Capital market investors, hitherto hostile to the president, hailed Mr Levy’s looming appointment.
Brazil’s currency was one of the strongest performing in emerging markets this week on expectations that his appointment would mean the president would rethink populist policies that won her the election but which have run the economy into the ground.
Brazil’s real weakened from a three-week high, falling 0.82 per cent against the dollar to R$2.52 on Thursday, while Brazil’s benchmark stock index, the Ibovespa, fell 0.47 per cent to 54,842.25.
In contrast to Mr Mantega, who has overseen a fiscal stimulus that critics say is jeopardising Brazil’s investment grade credit rating, Mr Levy is known to believe in tight control of government finances.
“He is a no-nonsense economist who knows that at the end of the day the priorities are a stable economy and a growing economy and there are no heterodox ways of doing that,” says Paulo Sotero, director of the Brazil Institute at the Woodrow Wilson International Centre for Scholars.
The appointment of Mr Levy and his economic team is potentially the biggest turning point for Brazil’s economy since Ms Rousseff took office from her wildly popular predecessor, Luiz Inácio Lula da Silva, in 2011.
The former president was seen as a pragmatist who was able to balance orthodox macroeconomic policies – such as keeping a firm lid on inflation and maintaining a healthy fiscal surplus – with the task of sustaining economic growth and increasing spending on social programmes.
On her entry into office, Ms Rousseff seemed prepared to follow the same path. But after the eurozone crisis in mid-2011, she launched policies that became known as the “new economic matrix”.
Ms Rousseff pushed down interest rates to historic lows, stepped up ad hoc tax breaks for selected industries and increased controls on the currency and fuel and energy prices to help control inflation.
While her government says the measures were driven by a state of almost permanent crisis in the global economy, critics say her interventionism went too far, deterring investment and killing off growth, which has lagged behind much of the rest of Latin America.
Worse, the combination of falling economic growth and rising gross public debt has placed Brazil’s prized investment grade rating in question.
This is something that Mr Levy is expected to fix. The head of one of Brazil’s biggest private sector fund managers, Bradesco Asset Management, he was national Treasury secretary between 2003 and 2006 and finance secretary for the state of Rio de Janeiro between 2007 and 2010.
With a degree in marine engineering, Mr Levy received his doctorate in economics from the University of Chicago and has served on the International Monetary Fund and the European Central Bank.
“His is a name that suggests the next finance ministry will enjoy more autonomy,” said Luciano Rostagno, chief strategist at Banco Mizuho do Brasil.
However, some question how effective he will be under a Rousseff administration. Mr Levy’s stint under former president, Mr Lula da Silva, coincided with some of the golden years of Brazil’s economy, when the commodity supercycle was in full swing.
His immediate boss was former finance minister Antonio Palocci, an astute politician who imposed the fiscal austerity that gave Mr Lula da Silva credibility among investors.
This time, his boss will be President Rousseff, a reluctant rationalist at best who is likely to blanch at any macroeconomic adjustments that risk a short term rise in joblessness.Mr Levy, during public appearances as head of Bradesco, has usually declined to criticise current government policy.
Goldman Sachs economist Alberto Ramos, who studied at the University of Chicago with Mr Levy and worked alongside him at the IMF, said he was an “excellent choice”.
But he recalls sitting on a panel with Mr Levy in New York when he consistently toed the government’s line. “He was trying to see the positive things taking place,” Mr Ramos said.
While some analysts dismiss this simply as a deliberate attempt by Mr Levy to make himself “politically viable”, Mr Ramos said the crunch would come when he attempted to take tough decisions that Ms Rousseff did not support.
He remarked that even if Ben Bernanke, the former US Federal Reserve chairman, was installed as the Brazilian finance minister, it would not make any difference if Ms Rousseff was not onboard.
“Having a voice of reason and having a solid orthodox voice within the cabinet is very valuable but the policies in the end will be Dilma’s decision,” he said.
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