After more than a decade of economic growth and middle class expansion, 2015 is a transition year for Brazil. It is a year for getting the economy back on track, after the slowdown in growth and weaker fiscal accounts in 2014. The country is responding to the acceleration of changes in the global environment, including the new policy stances of our main partners. The eventual raising of short-term interest rates in the US, where the fiscal stance has been more constraining in the last couple of years, is an important signal to the global economy. The adjustments in the Chinese economy, with a reduction of demand for commodities, have also impacted the prices of several of our exports. In such a scenario, domestic counter-cyclical policies have become much less effective, and fiscal consolidation will actually help the country to strengthen its competitive advantages.
The Brazilian strategy to deal with the challenges of the current environment has a two-pronged approach: first, swiftly restoring fiscal balance by restraining budget spending and rolling back counter-cyclical measures, including tax breaks and low-cost official credit; second, realigning prices and providing other avenues to stimulate investment. Given the diversity of our labour force, the vigour of the Brazilian private sector and the soundness of our financial system, we expect that with the right prices in place we will witness a relatively quick reallocation of resources and the recovery of growth.
The government expects to give a new boost to infrastructure concessions, given the appetite of investors for this type of asset and the broad range of opportunities available. The recent bid for the operation and expansion of the bridge over the bay in Rio de Janeiro is a good example of what can be achieved. The competition among the six companies that bid for this concession led to a reduction in the toll charged to users. More importantly, it resulted in the commitment to build several new access routes to the bridge, which will have a considerable impact on reducing congestion and improving the access of trucks to the new berths in the container port built by the private sector in Rio de Janeiro.
The federal government is also planning to move ahead with a number of unsolicited proposals made by the private sector, especially in roads and railroads. There have also been a large number of demands for the construction of private maritime terminals under the recently approved Framework Law for the Ports. The new law widens the extremely successful experience of conceding ports to the private sector, initiated in 1993. Since then, many ports have been built, expanded and refurbished, allowing in many facilities efficiency standards as good as those observed in leading ports in Europe and Asia, notably in the container trade.
The financing of infrastructure in Brazil will benefit from new instruments, such as project bonds and structures based on receivables from old and new projects, in addition to several forms of equity. A larger participation of capital markets will be essential to leverage the role of the national development bank, BNDES, which is developing new facilities, less dependent on public funds. Opening up investment opportunities to domestic and foreign investors in infrastructure brings social benefits both for future users of the infrastructure and for institutional investors who would benefit from a steady inflow of revenues from those projects.
Fiscal strengthening will also provide stronger foundations to Public Private Partnerships (PPPs). PPPs have been successful at the subnational level in areas such as sanitation, urban transportation and even prisons. They may now find new opportunities at the federal level. Fiscal credibility is the key to expanding PPPs without high-cost guarantees and other mechanisms. In line with the “what you see is what you get” standards of public accounts in Brazil, PPPs are accounted in a way to avoid them from becoming risky off-balance sheet items that could hide future costs to the public sector. The application of PPPs at the federal level appears to be particularly ripe in the railroad sector.
We do not underestimate the challenges ahead. Short-term risks such as the drought that is afflicting many regions in Brazil appear to be receding, while the issues surrounding the oil company Petrobras are being dealt with. In this regard, it is noteworthy that the average production of Petrobras has increased in 2014 after two years of declining output and the monthly production rose by over 10% year-on-year in the first two months of 2015. A major factor for the growth in oil production has been the success of the ‘pre-salt’ deepwater fields, which reached record levels in February. The oil extracted from there has proved of higher quality and more plentiful than originally projected, a result particularly welcome in an environment of low oil prices.
Also, the vigilance of the central bank has been translated into lower inflation projections for 2016, after the once-off adjustment in consumer prices triggered by the realignment of energy prices carried out early this year. This realignment is providing an important relief to electricity distributors, reducing financial risk in the whole energy sector.
We believe the measures that have been implemented since January are capable of leading us to the required fiscal effort, reinstate investor confidence, and pave the way to a new cycle of growth, less dependent on commodity prices. Of course, this will require persistence in the months ahead and close collaboration with the parliament. As we carry on our strategy, we will not lose sight of the big picture and the other measures, especially microeconomic reforms, necessary to ensure long-term growth and social development. By the time the Olympics Games in Rio de Janeiro start in 2016, we hope this new growth agenda will be well under way, building upon consistent fiscal results and investment-friendly economic conditions.
Joaquim Vieira Ferreira Levy is the Minister of Finance of Brazil