After a year of fiscal slippage, rising inflation, and negative projections showing that Brazil’s GDP will shrink 0.42% this year, President Dilma Rousseff has empowered her new Minister of Finance, Mr. Joaquim Levy, to coordinate an ambitious plan to recover the economy.
The economic downturn in Brazil transformed Levy not only into the most powerful Minister of Finance since the center-left wing Workers’ Party came to the power in 2002, but also into the most influential incumbent of Rousseff’s cabinet. As Rousseff is too busy spending her time trying to break the political deadlock with the Congress, Levy progressively becomes more free to enact market-friendly policies in Brazil.
The once imperious Rousseff has been compelled by circumstances to delegate the management of the economy. The success of her second term will depend more on Levy’s performance than on the other 38 members of her cabinet.
Levy’s economic recovery plan comprises the coordination of measures under the responsibility of other ministers, specially Armando Monteiro (Development and Trade) and Nelson Barbosa (Infrastructure Planning).
Mr. Levy has his own timing strategy to implement the plan this year, quarter by quarter, to ensure Brazil’s financial stabilization and foster a new cycle of growth from 2016.
Quarter 1: Restoring business confidence
Mr. Levy devotes the first three months of 2015 to promoting measures aimed at boosting confidence among economic agents and ensuring that Brazil preserves its investment grade seal.
One of the greatest fears for Rousseff is the country’s fate being the same as Petrobras, the state-run oil company downgraded this week by Moody’s to Ba2, two levels below investment grade. Even if the causes for the company’s downgrade are different – Petrobras is engulfed in a corruption scandal and has been unable to produce third-quarter results – this news has certainly a negative impact on the capital markets and beyond.
To avoid the worst case scenario, Levy’s macroeconomic goals encompass an inflation target at 4.5%, a floating exchange rate, and conservative fiscal surplus.
Given the strong commitment of the administration with fiscal belt-tightening policies, it is expected that:
- Brazil’s Congress will approve Rousseff’s plan to cut pension and unemployment benefits, seeking the financial stabilization of the country.
- State-owned banks will have their roles redesigned. The Federal Treasury will no longer grant loans to the National Bank of Economic and Social Development (BNDES), which will significantly reduce its engagement in private equity operations. A new business model is expected for BNDES.
- The government will change the governance and management rules of public funds, such as the Time Service Guarantee Fund (FGTS), the Workers’ Assistant Fund (FAT) and the Student Financing Fund (FIES).
Quarter 2: Business and trade programs
- Implementing reforms aimed at improving the business environment, including cutting red tape and reducing other bureaucratic obstacles to action.
- Improving the competitiveness of companies and implementing the National Plan for Exports, aimed at increasing international trade.
Quarter 3: Preparing a tax reform
- Simplification of taxes regimes: merging PIS/COFINS and simplifying TVA. Measures will not hinder the efforts to prevent gross product debt expanding.
Quarter 4: stimulating investments
It is worth mentioning that despite the economic scenario this year, Brazil is still a prominent global investment destination.
According to the UNCTAD’s World Investment Report 2014, Brazil holds the 5th position in the global ranking of foreign direct investment (FDI). The country’s FDI accounted for US $64 billion in 2013. In 2014, FDI inflows to Brazil amounted to $62.485 billion. In 2015, Brazilian Central Bank forecasts this amount will increase to $65 billion.
Part of the increase of FDI in Brazil is a consequence of the plan unveiled in 2012 to improve Brazil’s infrastructure, by concessions to the private sector to build and operate airports, ports, railways, and highways.
And there is still much room for an increasing demand, considering that Brazil is ranked 65 out of 160 countries in the World Bank Logistics Performance Index (LPI).
Then what?
If Levy’s plan meets its objectives this year, a new cycle of economic growth for Brazil will be inaugurated in 2016. Investors seeking new opportunities should be prepared to come back soon.