Top priority for next Brazilian president: keep Goldfajn on board.


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All eyes will be on the next Brazilian president’s first steps towards a much-needed fiscal adjustment. That will likely be Jair Bolsonaro – who is well ahead of Fernando Haddad as the final round of voting approaches on 28 October.

The markets have rallied on Bolsanaro’s rising polls. That’s largely because investors feared the PT (Workers Party) winning a fourth straight election. Memories of ousted president Dilma Rousseff’s fiscal laxity are too fresh not to overpower Haddad’s attempt to portray himself as a fiscal moderate.

But Bolsonaro will be a step into the unknown. He’s currently outsourcing economic policy to Paulo Guedes, a founding partner of BTG Pactual, by saying he knows nothing about economics. However, that alignment hasn’t been working too well: Guedes raised the prospect of financial transaction tax and privatizations of the large Brazilian state companies before Bolsonaro poured cold water over both proposals. 

Guedes then pulled out of some public events and there is an open question about his commitment to the Bolsonaro project. If tensions have appeared in a pretty one-sided campaign then the chances for the longevity of the partnership that will be exposed to raw politics and tough decisions don’t look good.

Everyone knows that Brazil needs a rapid fiscal adjustment, which means (among other things) pensions reform. Investors will be looking for good, credible news – and quickly – about how the next government intends to move to a swift primary fiscal surplus. The aim should be at least a primary surplus of 2% within two years.


Illan Goldfajn,
Brazilian Central Bank

But important as this is, the greater concern should be about monetary policy. The only positive development in the country’s financial position in the past two years has been monetary policy. Inflation has been tamed, finally, and is behaving despite wider volatility. 

The Central Bank has also introduced important reforms to lower the very high interest rates charged by the country’s banks and alleviate the burden that credit costs impose on the economy by limiting spending and investment. 

New regulations governing the state’s credit bureau and those that encourage competition from Fintechs are having a positive effect. Also, earlier this year the central bank finally put a stop to the ever-consolidating nature of the banking system by preventing Itau from taking a majority stake in XP Investimentos.

The Bank has also been important in changing the interest rate levied by the state development bank BNDES. Increasing the cost of “regulated” lending has lowered the cost of credit elsewhere by lowering the cross-subsidy.

Perhaps more importantly, the central bank is trusted and respected. Or rather, the Central Bank’s president, Illan Goldfajn, is widely trusted and respected. All these developments have come on Goldfajn’s watch. Rumours that he will leave the position he has held since June 2016 when the new President is sworn in are worrying.

Perhaps Guedes’s first job should be to explain to Bolsonaro that the central bank doesn’t have institutional credibility – the politically orientated policy decision making of previous incumbents of Goldfajn’s office saw to that.

Sadly, there doesn’t seem to be an appreciation of the excellent job Goldfajn has done in the incoming administration. Despite – or maybe because of – his reputation for competence and independence, there are growing fears he will be allowed to leave when all efforts should be being made to make him stay.

The last thing the next administration needs is to compound the enormous challenge they have on fiscal policy with unnecessary confusion and concern on the monetary policy. Losing Goldfajn’s assured control at the central bank would be an early own goal.