International investors are trying to understand the likelihood of adjustment to Brazilian economic policy in 2015. Capital flows and foreign direct investment have slowed in tandem with the economy, which reported a fall in GDP of 5% in the third quarter (investment led the way with a 2.2% fall quarter on quarter).
Many economists, waiting for fourth-quarter results, reckoned the country might be in a technical recession, with the central bank’s strong tightening of interest rates (up to 275 basis points last year) taking its toll on economic demand. However, on 27 February, it was announced the economy unexpectedly grew by 0.7% in the last quarter of the year, led by a pick-up in consumer spending and investment.
The central bank governor, Alexandre Tombini, is fighting stubborn inflation (annual Ipca is 5.9%), not helped by the devaluation in the real or the weakening fiscal policies of the government – the public-sector primary surplus is estimated to have been about 1.3% of GDP when stripping out one-off revenue items, down from 2.7% in 2010 and below its target of 2.3%.
The central bank’s apparent adoption of orthodox inflation-targeting policy has thrown even more focus on the fiscal side of the equation – not least because the rating agencies, Standard & Poor’s in particular, have increasingly emphasized the likelihood of a sovereign downgrade.
Brazilian bankers say they are being asked by international clients if there will be policy adjustment after the election in October this year.
"We have been talking to companies and contacts and we believe there are three scenarios," says a senior DCM banker, who believes president Dilma Rousseff will be re-elected. "The first is that [Rousseff] continues exactly as she has done, tinkering with taxes and weakening the fiscal base," he says. "The second is she tries to appear more market friendly, by replacing [finance minister Guido] Mantega and making some market-friendly speeches. The third is she now ‘gets it’, shifts policy and makes the adjustments that will drive investments and growth. The consensus is that the second scenario will happen – but the consensus is often wrong."
It is striking how little first-hand information from Brasilia is known by Brazil’s senior bankers.
However, Tony Volpin, a New York-based research analyst at Nomura, believes that "there is large consensus, even within government circles, though often expressed in private, that policies must change".
Volpin "believes there is strong intent to change course [on fiscal policy, but] an enormous difficulty in finding out what to do. The political calculus around fiscal policy will very likely change radically after the October election. After the election, investors and rating agencies will demand quick action on the fiscal front."
Others are less optimistic about a change in approach to economic management, believing Rousseff is guided by principles and beliefs and will be resistant to change simply because of pressure from markets and rating agencies.
Meanwhile, a senior banker challenges the widely based assumption that Rousseff will win the election: "I think the chances of her not winning have gone from 10% a few months ago to 30% today, and a Rousseff victory is priced in to the markets so there is only upside from the election result."
If central bank governor Tombini has specific insight, he isn’t saying: when asked by Euromoney if he expected his task to be helped out by greater support from the fiscal side in 2015 and beyond, he said: "Fiscal policy has its contribution, not only for monetary policy but also for the view on the Brazilian economy more broadly in terms of solvability, in terms of mix of policies, so let’s see what the government will announce. But certainly, from our part, we are implementing policy on the monetary side which is consistent with bringing down inflation, and we envisage further progress in bringing down inflation in the coming quarters."