Brazil’s Levy comes out fighting, dismisses fear of capital flight
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Emerging Markets

Brazil’s Levy comes out fighting, dismisses fear of capital flight

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Brazil’s central bank governor Alexandre Tombini and finance minister Joaquim Levy has used this week’s IMF meetings to convince investors they are getting Latin America’s largest economy back on track

Brazil’s top financial policymakers have launched a charm offensive to restore investor confidence in the crisis-ridden Latin American economy during this week’s meetings in Lima, despite the political climate worsening back home.

“I don’t expect to see capital flight. We have very large amounts of international reserves, we have a floating exchange rate. I cannot see any reason for a major capital flight,” Joaquim Levy, the country’s finance minister said yesterday.

His confidence comes despite the looming US interest rate increase, depressed commodity prices, China’s slowing economy and Brazil’s own mounting domestic problems.

He has been seeking to convince investors that his efforts to put the Brazilian house in order will gain the necessary support in Congress and that the largest Latin American country will be able to recover despite the fact that “challenges to global growth have been on the rise”.

“Experience shows that when fiscal uncertainty melts, economic activity rebounds in Brazil,” said Levy in an article he has written for Emerging Markets (see tomorrow’s paper).

Banking executives in and outside Brazil told Emerging Markets that there was a “high probability” that this strategy would work. “The very near-term strategy of fiscal adjustment would create a confidence shock [if approved by Congress] in order to calm down foreign investors and avoid further [credit rating] downgrades,” said a Brazilian banker.

Nevertheless, IMF officials appear not to share Levy’s optimism, forecasting an increase in Brazil’s gross debt-to-GDP ratio from 65.2% of GDP last year to nearly 70% of GDP this year, and to 74.9% of GDP in 2016.

“The Brazilian fiscal situation is very demanding,” said Vitor Gaspar, director of the fiscal affairs department at the IMF. “We do see gross debt as a percentage of GDP increasing quite significantly by almost 10 percentage points of GDP between 2014 and 2016,” he said.

The fiscal deterioration was the main factor behind Standard & Poor’s decision to strip Brazil of its investment grade status. Moody’s also said this week during a conference in Brazil that a downgrade may be in the offing if the government’s fiscal strategy failed.

“Economic prospects have deteriorated quite significantly relative to expectations, with GDP projected to contract by 3% in 2015 and still continuing to contract in 2016,” said Gaspar.

The central bank has signalled it may use international reserves to prevent the collapse of the real. This has so far managed to contain the major devaluation of the currency, which threatened to fuel inflation.

“The fiscal part of the adjustment is going at a slower pace [than the monetary and exchange rate one] but there is a consensus that there is a need for the fiscal adjustment to go as fast as we can,” said Alexandre Tombini, governor of Brazil’s central bank.

Meanwhile back in Brazil, the federal accounting court has rejected the accounts of the first Rousseff administration due to fiscal irregularities, which has increased the possibility of the president being impeached.

Although this would be a lengthy process, it has fuelled political tension, which has risen significantly since the disclosure of a big corruption scandal at Petrobras, the state-controlled oil company, last year. Political instability has jeopardised government plans to get its fiscal consolidation measures approved in Congress.

“There is difficult equation to solve. You have political fragmentation on one side, and a serious fiscal issue on the other hand,” said Ilan Goldfajn, chief economist at Itaú Unibanco.

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