Lula pledges new reforms
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Emerging Markets

Lula pledges new reforms

Brazilian president tells EM labour is included in programme

Brazilian president Luiz Inacio Lula da Silva has pledged to press on with structural economic reforms – including for the first time labour reforms – in his second term, in exclusive comments to Emerging Markets.

“Under the second mandate, the country is now in a position to implement a Programme to Accelerate Growth, without jeopardizing the stability that has been achieved,” Lula said.

“Plans for tax and labour reforms will be pursued throughout this period. And funds of some $240 billion will be invested in infrastructure projects in order to address bottlenecks in transport, sanitation and energy generation, that have delayed the resumption of sustainable growth in the past.”

Although plans to complete the tax reform had been announced earlier, efforts to push through labour reform have so far been resisted, and the renewed intention to make progress on this thorny issue will be welcomed by investors.

Companies operating in Brazil often complain that hiring and firing regulations are among the most punishing in the region, and the World Bank has also issued repeated critics against the rigidity of Brazil ’s labour legislation.

The Programme to Accelerate Growth (PAC) has become the government flagship programme for Lula’s second presidential mandate. It intends to boost economic growth from 2.9% last year to 4.5% in 2007 and 5% per year until 2010, when Lula ends his term. Nevertheless, the government has so far been unable to push through various bills and decrees that need approval by Congress.

However, amid growing concern about the impact of global economic slowdown, the Institute of International Finance (IIF) poured cold water on Brazil ’s ambitious plans: it forecasts that the growth rate will decline from 3.8% in 2007 to 3.5% next year.

But the Brazilian Central Bank’s president, Henrique Meirelles, has remained adamant that Brazil can accelerate growth, in line with the government’s official plans.

“ Brazil is at a different point of the economic cycle, if you compare it to other countries. Brazil is speeding up growth, not slowing down,” Meirelles told Emerging Markets in an interview. “We are accelerating growth thanks to the strong domestic demand.” 

At the inaugural Emerging Markets Latin America lecture Sunday, Meirelles said that Brazil is on the verge of starting non-inflationary growth. Such a view was backed by some analysts.

Paulo Leme, head of emerging market research at Goldman Sachs, said: “In the long run, Brazil is not insulated from the world cycle, but its economy is still pretty much closed, and for now it’s likely that the stimulus to the domestic market will work out.”

The aggregate mass of wage payments increased by nearly 7% last year, while credit indicators were also very positive. Meirelles said: “All this is leading to a gradual increase in supply, thanks to expansion of income, salaries, jobs, credit and the increased flexibility of the monetary policy.” 

He added: “The concrete fact is that Brazil is now much better prepared to weather such turmoil and international risk aversion. We have a surplus in the balance of payment and we have more than $100 billion in international reserves.”

Furthermore, the Central Bank head has ruled out any imminent risks on the foreign exchange markets, following the yen surprise rebound earlier this year. “This reminded carry traders that it is a two-way risk, and that it is not a one-way gamble. Maybe the markets were a bit exuberant,” said Meirelles.

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