Cold welcome for new Brazil finance chief

Listen to this article


Brazil’s new finance minister Nelson Barbosa received a bruising welcome on his first day in office on Monday from markets sceptical of his ability to deliver on promises to rein in the country’s fiscal deficit.

Brazil’s currency, the real, depreciated as much as 1.57 per cent against the dollar, extending losses from Friday and breaking through the R$4 mark for the first time since September. It was trading at R$4.0129 in the late afternoon. Brazil’s deficit is running at nearly 10 per cent of gross domestic product.

Mr Barbosa promised in an investor call on Monday to conduct a fiscal adjustment. But repeated backflips by the government this year on its fiscal targets have undermined its credibility with markets.

Brazil is facing its worst recession since the 1930s with economists surveyed by the central bank on Monday predicting economic growth would contract 3.6 per cent this year and 2.8 per cent in 2016.

“The capacity of the government to create a political consensus around a fiscal adjustment is very weak,” said André Perfeito, chief economist of Gradual Investimentos, a brokerage in São Paulo.

The negative reaction follows concerns that Mr Barbosa will be less committed than his predecessor Joaquim Levy to returning Brazil to a primary surplus, the budget balance before interest payments, considered a key gauge of the health of public finances in Latin America`s largest economy.

Mr Levy, a University of Chicago-trained fiscal hawk, tried repeatedly to implement spending cuts and tax rises to plug the fiscal deficit but was thwarted by infighting within the left-leaning government of President Dilma Rousseff and within Congress.

Mr Levy took office in January this year but resigned on Friday after Brazil lost its treasured investment grade credit rating first from Standard & Poor’s in September and then from Fitch this month.

The government’s strategy since the start of the year has been to “kick the can down the road” while using Mr Levy’s market-friendly credentials to promise — but not deliver — austerity measures, said Marcos Casarin, an Oxford Economics economist, in a note. “His loss further reduces the probability of fiscal adjustment.”

Mr Barbosa said in the investor call the government would take all necessary measures to create a primary fiscal surplus next year of 0.5 per cent of GDP.

He also said the government was planning to send reforms to the pension system to Congress for approval in 2016. The government was also planning measures to simplify the tax system.

Analysts, however, are concerned for Ms Rousseff’s ability to push legislation through Congress, given the fragility of her government.

Faced with an impeachment process from the opposition, she is being forced to court the left of her Workers’ party, the PT, which is opposed to tighter fiscal policy and reforms to labour conditions.

Congress, meanwhile, is in chaos, with many of its leaders looking to protect themselves from an expanding corruption investigation into Petrobras, the state-owned oil company.

“This is less a problem of who is there [as finance minister] and more a problem of the lack of political support that the government has today,” Mr Perfeito said.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from and redistribute by email or post to the web.