Brazilian finance minister Guido Mantega launched a staunch defence of his government’s Growth Acceleration Plan (PAC) in an interview with Emerging Markets this weekend.
Brazilian economic policy is entering a “new stage”, with a “much stronger emphasis” on GDP growth, Mantega said. He rebutted critics who say that the plan is focusing on public sector spending at the expense of squarely facing the big constraints on the economy.
“Our position used to be much more defensive, in order to strengthen the economy, due to the external vulnerability and the inflationary context,” Mantega told Emerging Markets.
During Luiz Inacio Lula da Silva’s first term, “the economy was in a much more precarious stage”. Now, Mantega said, “it is much more solid: we are entering a second stage”.
“There is a much stronger emphasis on economic growth”, Mantega said. Brazil has been trailing South American nations in terms of GDP performance over the past two years, but is aiming at reaching 5% growth from next year.
The PAC has attracted criticisms from the markets and elsewhere outside government. Charles Dallara, managing director of International Institute of Finance, said of the growth plan: “I’m disappointed with Lula II. He’s squandered much of the opportunity he had.”
Former finance minister Antonio Palocci who quit just a year ago, joined the chorus in a recent newspaper interview, saying that it would be a “mistake” to believe that the lack of private investment could be resolved by an injection of public money.
But Mantega told Emerging Markets that public investment would be boosted by the equivalent of 0.5% of GDP under the new plan. “This is not a substitution of private by public investment. Much to the contrary, the plan to accelerate growth is designed to boost private investment,” he said.
Mantega seems unconcerned that recent market jitters may unsettle his economic plans. “Even if there is a global slowdown, the outlook remains very positive as nearly 80% of the economic activity is related to the domestic market.
“If there is less growth externally, the strength of the domestic market will make up for it,” Mantega said, adding that domestic demand was growing at a pace of more than 5% per year.
“If the foreign trade surplus dropped from $45 billion to $38 billion due to a decline in commodity prices, we would still be in a comfortable position.”
Mantega expects 4.5% GDP growth this year, against a background of low inflation.The consumer price index was 3.1% in 2006, well below the official inflation target of 4.5%.
“As inflation ran well below target, it makes it easier to reach the centre of the target this year. Monetary policy can then be more flexible,” Mantega said, in a veiled criticism of the Central Bank’s reluctance to cut real interest rates, which are the highest in the world.