Investors breathed a sigh of relief last night following the announcement by Brazil’s new finance minister that economic policy will remain unchanged following the sudden departure of his predecessor last week.
“To those who have doubts about what is going to change in terms of economic policy, I can tell outright that nothing will change,” Guido Mantega told a packed audience of bankers and journalists.
Contradictory statements from Mantega and other officials sent shivers through the markets last week. Since then other government officials have engaged in similar damage limitation exercises and have succeeded in turning the tide of market sentiment. Paulo Bernardo Silva, the planning and budget minister, announced that fiscal discipline was here to stay, and that the budget primary surplus target of 4.25% would be extended until 2008, at least.
Mantega mentioned that the average fiscal primary surplus reached 4.56% of GDP in average between 2003 and 2005, as opposed to 3.55% under the second term of president Fernando Henrique Cardoso. “It is a definitive structural policy,” said the finance minister.
Such statements are music to bankers’ ears. “Brazil is coming out of the IDB in a better shape than it entered it, as the government has showed that economic policy is much more institutionalized and does not depend on a single minister,” said Sergio Werlang, executive director of Banco Itau. “Now it’s clear that the policy will not change.”
“Mantega will not have much room or ability to take a more heterodox approach to economic policy and this is good news,” said John Welch, chief economist for Latin America at Lehman Brothers.
Nevertheless, the former Central bank director Ilan Golfajn pointed out that it is not only the fiscal target that matters, but rather the way the targets are reached. “So far, we are not talking about spending cuts but we have had an increase in tax collection instead,” said Golfajn, now a director at the Gavea hedge fund.
He is also more critical of the changes at the finance ministry. “I hope they will hit the ground running. Once they get into the pitch, they have got to be hot and firm in order to contain public spending. This is not going to be easy.”