Brazil is in an extremely favourable position right now, but in the next few years I expect this to scale down to just "favourable", as excess liquidity in world markets comes down.
Our external results are good. We're running a current account surplus for the first time as an open economy. Gross external debt is about $50 billion and net of reserves it is close to zero.
Taxes still hurt
Growth in Brazil is constrained by high taxes that make it painful for the private sector to invest, and by poor management of fiscal spending, which privileges current spending - on public-sector wages and social security - over investment.
Fiscal reform has intensified under Lula, but the political limits to cutting current spending mean that investment as a percentage of GDP has only crept up from around to about 20.5% of GDP. We need to get it up to 25% to 27% of GDP without generating inflation or a budget deficit.
How can we do this? It's a false dilemma to say we can't increase investment without jeopardising our fiscal surplus. We can maintain the same responsible level of fiscal surplus, substituting one form of investment for the other. That is, cut the yearly growth in current spending.
Political maturity
Politics is an accommodation between what's right and what's achievable. Brazilian society is slowly being convinced that reducing government current spending and government debt will be a more sustainable basis for growth.
The outcome of the election is unlikely to make a difference to fiscal policy, as the candidates who are opposed to the current conservative policies don't get more than 20% of the vote.
The Brazilian way of doing things is: move slowly but surely. It's not as good a moving quickly and surely but it's a lot better than moving the wrong way. We've had a national debate on fiscal reforms, and now we're having a discussion about how to promote investment without sacrificing fiscal responsibility. That leaves me optimistic about Brazilian democracy.
Prepared to work
The two key points about Brazil right now are: first, that our external position is more solid than it ever has been, based not only just the growth of exports but on efforts by companies to increase their competitiveness. The challenge is for Brazil's manufacturing companies to survive in export markets. The shoe industry, for example, is starting to realise this: we've seen some shoe companies re-locate from the South to the Northeast where labour is cheaper. Commodities and commodity-based industries are of course highly competitive.
Second, society supports the fiscal effort. The current discussion is on the nature of fiscal reform, no longer whether to have it. In the past Brazilians loved to take shortcuts. We were not clear about the pay-off of hard fiscal work. Now weÕre more mature and there is a constituency in the country for fiscal improvement.
Andre Loes is Head of Economics and Equity Research at Santander Banespa in Sao Paulo. Email him at aloes@santanderbanespa.com.br