Fri. Dec 3rd, 2021

Brazil’s finance minister has promised to “fight to the end” to push through his trademark liberal reforms, despite growing concern about investors that President Jair Bolsonaro’s government has largely abandoned efforts to revamp the economy ahead of next year’s election.

In an interview with the Financial Times, Paulo Guedes rejected predictions that Latin America’s largest economy would enter a recession next year, saying his critics consistently erred in their predictions.

“We are going to surprise the world again,” the minister said shortly after returning from a trade and investment mission to the Gulf. “I’m not bragging about Brazil, I’m just saying you’re consistently underestimating us.”

Brazil’s economy is expected to grow by just over 5 percent this year, more than recovered from a contraction of 4.1 percent last year and most of Latin America performed better, thanks to one of the developing world’s largest government stimulus packages.

Guedes said the country had embarked on a “V-shaped” recovery and would grow as much as 2.1 percent next year, aided by more than $ 100 billion in private sector investment commitments.

He rejected the recent predictions of local banks aggressive interest rate hikes by the central bank to fight inflation and growing market turmoil ahead of the October 2022 presidential and congressional elections will stagnate or shrink the economy.

“Natural [the banks] is wrong. Either they are wrong or they are politically militant. They are trying to influence the election. . . “They still did not accept the election of Bolsonaro,” he added.

“Brazil is more likely to have some growth and resilient inflation [next year] as lower inflation and no growth ”.

Guedes, a former investment banker who was educated at the University of Chicago and studied under Milton Friedman, received praise from the market when he took over as head of a “super-ministry” in 2019 that combines several departments.

Investors liked his ambitions for major structural reforms, his stress on fiscal justice and his promises to curb Brazil’s huge public debt. But after some successes such as cutting the cost of state pensions, privatizing some 200 billion reais ($ 35.6 billion) in assets and granting independence to the central bank, Guedes’ commitment to fiscal discipline is now in doubt. .

The Bolsonaro administration is seeking congressional approval for a constitutional amendment that would circumvent a mandatory spending ceiling to help pay for improved cash handouts to 14.6 million of Brazil’s poorest families before the election.

The legislative maneuver spurred several keys Finance Ministry officials resign last month and sparked a sharp market reaction that forced Brazil’s real to near record lows of 5.5 against the dollar.

Guedes denied that Bolsonaro’s new cash transfer program, Brazil aid – which he describes as a “Milton Friedman minimum income concept” – was a sign that he had abandoned fiscal justice.

“They put pressure on me [saying] ‘Oh, Paulo Guedes’s becoming a populist’. No, that’s it, ”he said, pointing to a ministry projection showing that government spending next year would drop to 18.4 percent of gross domestic product with the spending limit exceeded, instead of a previously predicted 17 , 5 percent. “We are talking about a delay in the fiscal speed of adjustment.”

Guedes believes the market has not realized that most of the extra spending has been forced by a sharp and unexpected rise in the number of court-ordered government debts to be paid. He described the development as “a meteor from outer space” that “flew over previous governments” when “suddenly decided to attack us”.

Wall Street economists are not convinced. “Recent budget developments have significantly eroded the credibility and efficiency of the main fiscal anchor, the constitutional spending ceiling,” said Alberto Ramos, chief economist of Latin America at Goldman Sachs, in a note.

Mauricio Molon, chief economist at Logus Capital in São Paulo, said Guedes was “a very smart guy with a liberal view of the economy, who was convinced he would be a powerful minister under the Bolsonaro government.” But it turned out that politics had triumphed and now he is a lame duck ”.

By cutting a more lonely figure after the departure of more than a dozen assistants over the past two years, the minister remains determined to continue to advance his liberal reforms until the end of Bolsonaro’s term.

“This year we have another chance ‘to implement tax reform,’ he said. When it comes to selling Eletrobrás, Latin America’s largest electricity company, ‘we’ll fight until the last day.’ the contracts of new civil servants “we will fight to the end”.

But many of the initiatives are stuck in Congress and analysts believe that with an election on hand and his poll’s rating bag, Bolsonaro will not spend valuable political capital on potentially unpopular projects.

Despite the headwinds, Guedes remains positive, saying investors have not acknowledged the extent of the changes taking place in his country.

“We are changing the axis of the Brazilian economy. After 40 years of government-driven growth, our private sector is going to grow – it’s decentralizing, it’s pervasive, it’s all over. It’s wind [power], oil, natural gas, electricity, cabotage, railways, airports, seaports, it’s everywhere. ”

As for the center-left opposition, “they continue to hit their drums [saying] “This year is going to be a collapse.” No collapse. . . “Next year is going to be a disaster.” Forget about it. That will not happen.”

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