Brazil urges EM reforms while reaping inflation reward
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Emerging Markets

Brazil urges EM reforms while reaping inflation reward

The governor of the Brazilian central bank had words of wisdom on the need for emerging markets to reform as he was able to celebrate the lowest domestic inflation for 18 years

Emerging economies must use the next few months to embark on reforms, Brazil’s central bank governor said yesterday as he was able to reap the first rewards in his fight against inflation at home.

“Emerging markets have a window of opportunity in the current era of low interest rates,” said Ilan Goldfajn. “We need to use this time to adjust and reform. This is the exact time to do it and achieve a virtuous circle of growth and low inflation.”

Brazil’s benchmark inflation rate posted a 0.08% increase in September, the lowest rate in 18 years. In spite of this clear deceleration, 12-month inflation still amounts to 8.5%, well above the official target of 4.5%.

“This is a positive surprise, but we also had negative surprises in the past, so we need to keep our heads cool. We have to find out whether this is a temporary blip or a trend,” he said.

Goldfajn acknowledged that Brazilian policymakers faced an even tougher task than their emerging market peers. “There is an additional question in Brazil which is the need for economic recovery,” he said.

“We are going out of a recession, trying to regain confidence, recover jobs, this is going beyond the international environment. We need to deserve that confidence and adjust accordingly.”

The preliminary approval of a public spending cap in the lower house of Congress earlier this week and the fall in inflation may be early signs of the end of the deep crisis.

“There have been various signs that the Brazilian economy is returning to normal,” said Henrique Meirelles, Brazil’s central bank governor. “What was not normal is to have high inflation during a recession and rising unemployment,” he said.

Some investors have already hailed “a big change”. “Investors see Brazil evolving and getting out the crisis. I saw much more willingness to go deeper in analysing business opportunities there,” Helio Magalhaes, Citigroup country officer for Brazil told GlobalMarkets.

“Some assets are still relatively cheap in Brazil, even with the valuation, they are still cheap. So you will probably see many more transactions, M&A, acquisitions in 2017.”

Credit rating agencies have been more cautious so far, given the magnitude of the fiscal and political challenges that Brazil is facing.

“There has been a lot of signalling from a strong team, but we want to see execution,” Lisa Schineller, managing director of sovereign ratings at Standard & Poor’s told GM. “We have not seen much on the execution side. The spending cap has started advancing in Congress at committee level, but that is really the first step of the structural reform [process].”

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