Heavy politics has finally taken its toll on Antonio Palocci's legendary good humour. In mid-August, the 44-year-old Brazilian finance minister had to call a Sunday press conference to deny any involvement in a corruption scandal that threatened to cause market jitters and jeopardize hard-won economic stability. "I am trying not to lose my sense of humour," he admitted in the course of a long interview during which he categorically rejected allegations of financial malpractice before he joined the government. He sounded convincing enough. When financial markets re-opened the following day, the stocks went up and the country risk went down to around 400 basis points.
Even though Palocci can celebrate the brilliant turnaround that the economy has achieved during the past three years, he is well aware of the damages that can cause a widespread probe into corruption that has already caused the resignation of several high-profile cabinet ministers. His own chief of staff (cabinet chief Juscelino Dourado) at the finance ministry, who had been his right-hand man for more than 12 years, also left 24 hours after appearing before a parliamentary investigation committee.
Palocci said he had taken "a cold shower" before facing the ongoing controversy. But he sounded confident enough to reassure investors that sound economic policies will remain in place. "Next year, one of the highlights we'll be discussing will be the resilience that the economy will have undoubtedly displayed in the face of the current political uncertainties," he said during a seminar on inflation targets in Rio de Janeiro. His words came on the eve of the release of positive growth figures, showing that GDP increased 3.4% during the first half of the year compared to the same period in 2004. "We look forward to one of the most important growth cycles of the last decades," he later said. The government expects growth to amount to 5% next year.
After the IMF loan
Thanks to a strong primary budget surplus and booming exports, Brazil decided not to renew its loan agreement with the IMF (which had helped to meet its borrowing requirements since 1998) earlier this year. It has successfully managed to finance its $200 billion foreign debt on the international capital markets, partly thanks to great liquidity flows towards emerging markets. Orthodox structural policies have also improved the country's macroeconomic situation. "What has been protecting the economy is the reserve in the trade balance [some $40 billion surplus this year], current accounts, the achievement in terms of country risk, fiscal accounts, low inflation ... These are the elements that give a solid armour plating to the economy and that lead to an improvement of economic indices, despite a difficult period in terms of politics."
Palocci has also increasingly been sounding like a statesman. While his boss, President Luiz Inacio Lula da Silva, frequently lashes out at his predecessors' policies, the Brazilian finance minister has hailed some of the reforms implemented by former presidents, such as the fiscal responsibility law, which limits public spending. He has also been considering with some sympathy other suggestions to zero the nominal budget deficit in the medium term (which would imply additional budget cuts). But this may be a distant prospect. In the meantime, Palocci is trying to push forward reforms of the local mergers and monopoly commission (Cade) and the opening of the reinsurance market to private competition. "The current political crisis can't grind the country to a halt," Palocci said.
The finance minister also stands firm on his anti-inflation stance and the central bank's tight monetary policy (the benchmark Selic rate has been left at a very high 19.75% per year for several months, in spite of a continuous decline in consumer price indices)."Interest rates are never increased by whim, but in order to keep inflation under control," he explained. Indeed, such policy has managed to revert market expectations. The inflation forecast is now converging towards this year's official inflation target of 5.1% (down from 7.6% last year). "Monetary policy will strengthen long-term gains", he said.
Tough talk
Such a staunch defence of monetary orthodoxy has caused uproar among industry leaders and politicians alike. The vice-president, Jose Alencar Gomes da Silva, himself is an old-time critic of prohibitive interest rates. But the harshest words come from left-wing activists. "The three musketeers [Palocci's top advisers] are the ones who run the Fazenda [finance ministry]," said Joao Pedro Stedile, head of the Landless Rural Workers' Movement (MST), who advocates a radical U-turn in economic policy in order to address the country's pressing social needs and implement land reform. "They are the same who were serving under [the previous president] Fernando Henrique Cardoso. Palocci himself is a physician; he is an ignorant as far as economic policy is concerned!" Added Stedile: "The government's priority is to keep paying debt servicing." This is music to investors' ears.