Goldfajn: Fiscal reforms crucial for sustainable recovery

After several weeks of market volatility, Brazil’s government and central bank have been trying to restore market confidence amid emerging market jitters. Their method? “We don’t overreact to short term shocks,” Ilan Goldfajn, central bank governor, told GlobalMarkets in an exclusive interview at the bank’s office in São Paulo.

The central bank has just revised its GDP growth forecast to 1.4% from 1.6%. But Goldfajn insists that in spite of its sluggish growth, the Brazilian economy still has a pretty good line of defence. “Our balance of payment is relatively well behaved,” he says. “We only have a small 0.8% current account deficit. We do have FDI flows of around 3.5% of GDP although it used to be 4.5%, but it is still much higher than the current account deficit.”

In spite of turmoil on the foreign exchange market, reserves are still at a very high level of $380bn, or the equivalent of 20% GDP, he says. “The government does not have a lot of dollar-denominated debt. We are actually long in dollars. The financial system is very resilient and we have relatively low inflation. All of this gives us quite a bit of a buffer,” he says. Indeed, inflation is well behaved and slightly below the official target of 4.5%.

INFLATION PRIZE

Nevertheless, the fiscal vulnerability still needs to be dealt with as soon as possible. “We are well placed in terms of balance of payments, in monetary policy but we still need to consolidate fiscal reforms, including the pension reform,” he says.

“I believe that the issue will be addressed. The sooner the better. The sooner you address it, the better the chances we have low inflation and low interest rates and a sustainable recovery. Reforms can offer a better opportunity to keep inflation low and for neutral interest rates to be lower so that the economy can recover in a sustainable way,” he says.

The Temer government, which was appointed after the left-wing president Dilma Rousseff was impeached in 2016, has an honourable reform record. Henrique Meirelles, who was finance minister at the time, convinced Congress to pass a budget spending cap, which prevents real increases in public expenditures for at least 10 years. “The spending cap underscores the necessity to approve the pension reform,” says Goldfajn. An important labour reform that reduces employers’ costs was also approved. In addition, several other microeconomic reforms were promoted by the central bank, such as a cut in subsidies from the national development bank (BNDES) and a new system of electronic guarantees.

PENSION REFORM

Meanwhile, the widely unpopular pension reform has remained problematic, especially with a general election looming. “This government has tried to approve it several times. Last year it was almost ready to approve it. It had enough votes (in Congress). But then you had some political instability in May, and the government was not able to approve it,” says Goldfajn. “This year, we tried several times, but the proximity to the elections prevented it from being approved.” Brazilians were due to go to the polls on October 7 in the first round of voting of the presidential election. At time of going to press, the two frontrunners were the far-right candidate Jair Bolsonaro, a former army captain, and a left-wing contender, Fernando Haddad, from former president Lula’s Workers Party. Lula himself has been in jail since April after he was sentenced to 12 years for corruption. A runoff is scheduled for October 28.

The reform is still ready to be voted on in Congress. It would bring savings of some 1.4% of GDP, says Mario Mesquita, chief economist at Itaú Unibanco, Brazil’s largest private bank. It may not be sufficient to clear the primary fiscal deficit immediately, but it would prevent the fiscal deficit spiralling out of control.

Most presidential candidates have largely dodged the issue during the electoral campaign. “They do not want to elaborate so much on fiscal adjustment right now, because this is not a popular issue — not in Brazil, nor anywhere else,” says Mesquita. “But I spoke to the economic advisers of most candidates. They may have different approaches, but none of them denies the importance of the fiscal issue.”

The main threat, according to him, is not the risk of insolvency, like in Argentina or in Greece, but of a return of inflation. “Brazil will not become like Greece because we owe our debt to ourselves, basically (there is only a small part of the debt which is denominated in dollars),” he says. “What Brazil may become is ‘old Brazil’, meaning an inflationary Brazil. We do have a very serious problem. If reforms are not implemented, the end result will be inflation — possibly double digit. It would be a very aggressive way to do the adjustment.”

But so far, people like Ilan Goldfajn have been in office to make sure that this will not happen. “What’s the expression?” he says with a smile. “Keep calm, and keep walking…”