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“It is too early to pay out and reverse all the measures we took last year. We need to wait and see what is going on in the world economy” |
Brazil’s officials have a right to feel smug. The country is showing tentative signs that it is emerging from the recession, with economic growth reaching 1.9% in the second quarter. In addition, the government got a boost last month when Moody’s joined Standard & Poor’s and Fitch in awarding the sovereign investment-grade status. Despite these positive signs, Miguel Jorge, minister of development, industry and foreign trade in Brazil, is still cautious about the country’s outlook. “It is too early to pay out and reverse all the measures we [the Brazilian government] took last year. We need to wait and see what is going on in the world economy – in the US and UK. It is not clear what is going to happen globally and so we need to be cautious despite the impressive second-quarter figures.”
Henrique Meirelles, central bank governor, adds: “[It’s] not time to lower our guard.” Even though the second-quarter results show that the government’s policies are working, Meirelles is keen for these policies to be extended – “in short, to maintain the policies that are working”.
Key policies
Key policies that helped to keep credit flowing and drive the economy in the last quarter include substantial tax cuts on cars and construction materials, a provision allowing the biggest banks to tap their reserves held at the central bank to buy mid-tier bank credit portfolios, and a sharp reduction in interest rates from 11.5% to 8.75%.
The government hopes that these measures will help the economy to grow this year albeit marginally, by 1%, although economists at Barclays predict it will still shrink, by 0.4%.
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Brazil’s growth rate in second quarter |
With the economy beginning to recover some officials are calling for a reversal of the government’s fiscal policies. For example, the tax agency is pushing for auto taxes to return to pre-crisis levels. Car tax dropped by between 15% and 25%, depending on model and age of car, to near zero for some vehicles. “The problem is that the tax people only see the direct impact of a reduction in car taxes but they don’t see the indirect advantages, such as overall more sales which lead to higher employment levels,” says Jorge. “I say there are good things that come out of crises. One is to prove to people that if you cut tax you sell more, therefore in the end you collect more tax.” However, despite Jorge’s strong argument he says that auto taxes are due to start increasing again on October 1 with the aim of restoring them to their former levels by the end of the year. But he says the government is likely to be less flexible about construction material taxes. “The government has a building programme in place. If they raise the tax on construction material again then this programme will just cost the government more.”
A government-sponsored programme, My House, My Life, has resulted in more than R$32 billion ($17.8 billion) being invested in the housing industry in the past 12 months. This programme aims to build 1 million new houses in two years and seems to be on track, with more than 350,000 houses already financed. This push to make up Brazil’s housing deficit, which still stands at more than 6 million, is also driving private companies in the construction industry to raise money in a desperate bid to met new, government-driven, demand.
So far six Brazilian homebuilders have announced plans to raise more than R$4 billion in new share issues in the coming weeks. Follow-on offerings are expected from PDG Realty (R$750 million), Rossi Residencial (R$660 million), Brookfield Incorporações (R$500 million), Multiplan (R$750 million) and Cyrela (R$500 million). Another homebuilder, Direcional, is seeking an IPO. This sudden surge in equity offerings is reminiscent of 2007, when real estate developers raised more than R$8 billion.
Oil bonus
One boon for Brazil’s long-term future is the recent discovery of between 50 billion and 200 billion barrels of oil in the deep-sea pre-salt fields off the Atlantic coast. Jorge says the government has just finalized details about a sovereign wealth fund that will be created to invest surplus oil revenues. “We have had long discussions about the sovereign wealth fund. We don’t want any kind of Dutch disease [when revenues from natural resources lead to an uncompetitive exchange rate]. We have a strong base in Brazil and I think we are lucky we didn’t discover oil in the 1950s and 1960s when this industrial base wasn’t in place. The money will be used for social development – education, health, culture and to encourage innovation and entrepreneurialism. This is different from Norway where they use the money for the government deficit.”
