Brazil's financial fortunes have improved significantly with Antonio Palocci at the ministry of finance. In spite of critics from left and right, his moderate fiscal policies, combined with those of the central bank, have led the economy back on the growth path and reduced external vulnerabilities. This has given the government more freedom to choose not to renew an agreement with the International Monetary Fund - a big statement by Brazil that it can develop on its own.
Palocci, a Trotskyite in his youth, may still be more of a skilful politician than an economist, but he has formed a team of trusty young technicians, many of them coming from the World Bank. They have had some good figures to boast about: two years after the public debt-to-GDP ratio hit 61.7%, the economic team has managed to bring down this critical ratio to 51.5%. But Joaquim Levy, the treasury secretary, would like to go further, and he has set himself an ambitious goal. "Our target is to reach 40% [of GDP] in order to achieve more tranquillity as far as this indicator is concerned," he recently told a Congressional committee.
Meanwhile, the central bank has acted to reduce the proportion of dollar-indexed bonds in the public debt stock. The proportion has fallen from its peak at 40.6% three years ago to around 5%. The strong fiscal performance, with a primary budget surplus of 4.6% of GDP in 2004, also boosted investors' confidence, even though some critics have warned against excessive public spending.
The emphasis on orthodox economic and monetary policies has paid off. Last year the economy grew by 5.2%. "There were several pressure groups that defended different economic policy options [namely lowering domestic interest rates] and the winner was clearly the group led by minister Palocci," says Dalton Gardimam, chief economist at Calyon in Sao Paulo. Economic growth was driven partly by strong liquidity in the international markets but was because of private consumption and investment. And while the growth rate might not be as strong this year – the consensus is 3.5% - that figure would still represent a solid year of consolidation.
Private investment drive
The sustainability of economic growth will now largely depend on the ability to attract private investment in key sectors, such as infrastructure. Towards this end, Congress passed a bill late last year to encourage public/private partnerships (whereby private companies would receive a guarantee of minimum return for their investment). Paulo Bernardo, a close friend of Palocci's, was appointed planning minister in March, and will be in charge of its implementation.
Financial indicators have also improved significantly, with Brazil's country risk premium at 400bp over US Treasuries, according to JP Morgan. Several bond issues have been conducted within the past six months in dollars and in euros, in order to take advantage of a solid domestic performance and a favourable international environment. The continued improvement in the current account was driven by a vigorous export drive. In 2004, exports increased by 32% (in spite of the weak dollar), and the foreign trade surplus amounted to a record $33.7 billion.
Luiz Fernando Furlan took quite a challenge when he decided to leave a top executive position in a food company to assume the foreign trade portfolio in 2003. Now with some good humour, he says: "We have already been much closer to hell a few years ago, but I am sure now that we are on our way to heaven." Brazil's export target for this year is $110 billion.
The current account surplus reached an all-time high of $11.7 billion or 1.9% of GDP (contradicting many analysts who had predicted a new deficit in 2004). The inflows of dollars, including $18.2 billion in foreign direct investment, demonstrated investors' confidence. The real appreciated against the dollar (as most other currencies did) but exports continued to be strong.
More active
Often criticized for its passivity, the central bank started to intervene discreetly in the foreign exchange markets to boost its currency reserves and reduce the amount of foreign debt. Both moves proved successful and reduced part of the external vulnerability that the country has long been suffering.
As result, total dollar reserves amounted to more than $60 billion in March, the highest level since 1999, including an estimated $35 billion in net reserves (excluding the IMF loans). Total foreign debt reached $203.5 billion (including $116 billion of public debt), or $13 billion less than a year before.
In spite of all the good news, Brazil's large debt still requires attention. Even though the debt profile has improved, the amount of debt is considerable. In addition, Brazil faces some short-term financing issues, as about 40% of foreign debt comes due by the end of 2006. Financial analysts put the country's financing requirements at some $40 billion during the next two years. Under such circumstances, Palocci's continued success as finance minister will largely depend on benign international conditions and favourable winds blowing for emerging markets.