Pictet: In Brasilien liegen Veränderungen in der Luft

Brazil has just unveiled new plans to restore economic growth and boost investor confidence. But will President Dilma Rousseff and her economic team succeed in turning around the Latin American giant’s fortunes? Mary-Therese Barton, senior investment manager of emerging market debt, went on an extensive field trip to the country to find out.

As I landed in Rio de Janeiro and kicked off a busy day packed with various meetings, I was immediately struck by the optimism of local people over how Rousseff and her financial tsars can pull Latin America’s largest economy out of a four-year slump, in contrast to the rampant pessimism among foreign investors. 

There is no denying that the current situation in Brazil is dire and foreign investors don’t like it. There is a long list of negatives: the economy is flirting with recession, inflation is at the top end of tolerance levels and prices for iron ore, soybeans and other key commodity exports are falling. At least one international ratings agency has hinted at a credit downgrade of the country, while a multibillion-dollar graft scandal engulfing state-run oil giant Petrobras is threatening to further undermine investor confidence. 

However, being in the country and meeting locals, I felt a real sense of optimism and determination – a strong belief that something needs to be done.

Confidence boost

For its part, the administration is clearly looking to jolt investor confidence. It has already announced cuts in subsidies to public banks, higher interest rates at state development bank BNDES and limits to pension and unemployment benefits to shore up its depleted public finances.

But more importantly in my view, the government is taking a huge step in the right direction by appointing Joaquim Levy as Finance Minister. A Chicagoeducated orthodox economist and banker, Levy has also worked at the IMF and European Central Bank and is known for slashing spending during his 2003-2006 stint at the treasury.

Officials and bankers I met were almost unanimous in saying that reining in public spending is the most important task for Brazil in the next four years and that Levy is the one for the job. According to one official I met, Levy “underpromises and overdelivers” – this is what you need when you must make difficult budget cuts and tax hikes.

Many investors are however doubtful that Levy will have the autonomy to implement the full set of changes to improve fiscal finances because Rousseff is famously interventionist (she has apparently already told the new planning minister Nelson Barbosa to change his stance on modifying the minimum wage adjustment formula given the promises she has made to union leaders). Yet many people I spoke to believe the President will leave Levy alone and let him get on with the job, because she has no other choice. One official observed: “I don’t think she has changed, but she is certainly adapting.”

Der vollständige Kommentar im pdf-Dokument