Brazil’s Finance Minister vows to ‘fight to the end’ to save reforms

Brazil’s finance minister has vowed to “fight to the end” to push through his trademark liberalization reforms, despite growing investor interest President Jair Bolsonaro’s government has largely abandoned efforts to overhaul the economy ahead of next year’s elections.

In an interview with the Financial Times, Paulo Guedes dismissed forecasts that Latin America’s largest economy will fall back into recession next year, saying his critics have repeatedly wronged his predictions. surname.

“We will surprise the world again, shortly after returning from our trade and investment mission to the Bay Area,” the minister said. “I’m not bragging about Brazil, I’m just saying that you’ve always underestimated us.”

Brazil’s economy is expected to grow by just over 5% this year, more than recovering from a 4.1% contraction last year and outperforming most Latin American countries, thanks to one of the largest economic packages in the world. government stimulus is developing.

Guedes said the country has entered a “V-shaped” recovery and will grow 2.1% next year, supported by investment commitments from the private sector of more than $100 billion.

He dismissed recent forecasts from local banks interest rates rise sharply by the central bank to anti-inflation and the growing market turbulence ahead of the October 2022 presidential and congressional elections will cause the economy to stall or shrink.

“Of course [the banks] is wrong. Either they are wrong or they are politically militaristic. They are trying to influence the election. . . They still do not accept Bolsonaro’s election,” he added.

“Most likely Brazil has some sustained growth and inflation” [next year] than lower inflation and no growth”.

A former University of Chicago-trained investment banker who studied under Milton Friedman, Guedes won acclaim from the market when he assumed the position of head of a “superstar” ministry” combines several departments in 2019.

Investors like his ambitions for major structural reforms, his stress about fiscal precision and his promise to rein in Brazil’s rising public debt. But after some successes such as cutting government pension costs, privatizing some 200 billion reais ($35.6 billion) of assets, and giving central bank independence, Guedes’ commitment to fiscal discipline is now in doubt.

The Bolsonaro administration is pursuing Congressional approval of a constitutional amendment that would bypass the mandatory spending cap to help pay for raising Give cash to 14.6 million poorest families in Brazil before the election.

Legislature has driven several important things officials from the finance ministry will quit last month and triggered a strong market reaction, pushing the Brazilian real to a record low of almost 5.5 against the dollar.

Guedes denied that Bolsonaro’s new cash transfer program, Auxilio Brasil — which he describes as “Milton Friedman’s concept of minimum income” — is a sign he has abandoned the fiscal attitude.

“They put pressure on me [saying] ‘Oh, Paulo Guedes is becoming a populist’. No, this is it,” he said, reflecting the ministry’s forecast showing government spending falling to 18.4% of gross domestic product next year with the spending limit breached, rather than the 17.5% of the previous forecast. “We are talking about decelerating fiscal adjustment.”

Guedes believes the market hasn’t appreciated that most of the extra spending is due to the sudden and sharp increase in the amount of court-ordered government debt that is due to be paid. He described the development as “like a meteor from outer space” that “flyed over” previous governments then “suddenly decided to fall on us”.

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

Mauricio Molon, chief economist at Logus Capital in São Paulo, said Guedes was “a very intelligent man with a liberal view of the economy who believed he would become a powerful minister under the government. Bolsonaro. But it turns out that politics has prevailed and now he’s a lame duck.”

Cutting to a lonelier number following the departures of more than a dozen aides over the past two years, the Minister remains determined to continue pushing his liberal reforms until the end of Bolsonaro’s term.

“This year we still have a chance” to pass tax reform, he said. When it comes to selling off Eletrobrás, Latin America’s largest electricity company, “we will fight to the end”. On the changes to the contracts of new government employees “we will fight to the end”.

But many initiatives are stuck in parliament and analysts believe with an election looming and poll ratings sagged, Bolsonaro will not spend valuable political capital on potentially unpopular projects.

Despite the difficulties, Guedes remains optimistic, saying that investors have not realized the scale of the changes taking place in his country.

“We are changing the axis of the Brazilian economy. After 40 years of government-driven growth, we are driving private sector growth – it’s decentralized, it’s spillover, it’s all over. It’s windy [power], oil, natural gas, electricity, vandalism, railways, airports, seaports, it’s everywhere. ”

As for the centre-left opposition, “they keep beating the drums [saying] ‘This year will be a year of collapse’. No crash. . . ‘Next year will be a disaster’. Forget it. No se won’t happen.”

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