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An ambitious constitutional amendment to freeze budget spending would cut the uncertainty over public finances that is the root cause of Brazil’s deep recession, according to the country’s new finance minister.
“With this kind … of tough fiscal policy … everyone will be able to project the numbers,” Henrique Meirelles said in an interview with the Financial Times. “A lot of the uncertainty is coming down.”
The plan to eliminate real increases in budget spending for up to 20 years is the central plank of a number of reforms — from fiscal policy to rules on pensions and the operation of Petrobras, the scandal-hit state oil company — that the government of interim president Michel Temer is rushing through congress.
Elevated to power by an impeachment process brought against President Dilma Rousseff for allegedly manipulating the budget, Mr Temer is staking his leadership on stabilising the economy and stemming an alarming rise in public debt.
Once a fast-growing emerging market, Brazil’s gross domestic product shrank 3.8 per cent last year and is expected to decline by the same amount this year.
Many blame Ms Rousseff’s government, which through the granting of ad hoc tax breaks and intervention in the economy sharply increased gross public debt to 67.5 per cent of GDP from just over 52 per cent in mid-2014.
The uncertainty over Brazil’s public finances has left the country with credit default swap spreads, a measure of the likelihood of default, of 345 basis points.
This was down from highs of near 500bp earlier this year during the political crisis leading up to Ms Rousseff’s impeachment, but still above other emerging markets with similar credit ratings, such as Russia with 258bp. Mr Meirelles said this measurement could fall rapidly if confidence returned.
“If it comes [down] to half of what it is today [that would have an] effect on interest rates and … together with GDP growth, total public debt [as a] percentage of GDP might stabilise and drop before people expect it,” Mr Meirelles said.
I don’t like to make projections because I prefer to try to at least under-promise and over-deliver
He added: “But I don’t like to make projections because I prefer to try to at least under-promise and over-deliver.”
Mr Meirelles said he hoped the budget plan would pass congress by the end of the year, saying he encountered little resistance when he presented it to leaders representing 340 congressmen from the 513-seat lower house.
A veteran of Brazil’s last crisis in 2003, when he was central bank governor under the then nascent administration of leftwing former president Luiz Inácio Lula da Silva, Mr Meirelles said this crisis was different.
That earlier emergency was a balance of payments crisis, not a budgetary problem. Today, with $370bn of foreign exchange reserves, Brazil’s external accounts were more solid. The problem, instead, was one of unsustainable fiscal deficits, he said.
“This recession is not externally driven,” he said, contradicting the view of the Rousseff government that the downturn was caused by the global financial crisis. “It’s domestically driven.”
He insisted his government’s aim was to deal in “facts” and provide an accurate assessment of the situation. “Brazilians got used during [recent] years to listening to optimistic numbers,” he said.
The new government dug into the public accounts when it took power in mid-May and discovered large numbers of government debts, including to multilateral organisations and service providers, were “past due”.
It announced a much deeper budget deficit target of 2.75 per cent before interest payments. This was about 70 per cent higher than the target the Rousseff government had had for this year.
The other difference between Mr Meirelles’ job now compared with 2003 is that as finance minister he needs to deal with politics. The central bank chief in Brazil is largely autonomous.
But he said Mr Temer, who has served as leader of the lower house three times, was adept at fielding most of the politics surrounding the government. “I’m not going to congress everyday fighting in small meetings,” he said.