Having won reelection by a thin margin, President Dilma
Rousseff named Joaquim Levy as her new Finance minister. This is good news, but it will not win over skeptics
yet, of which I am. The reason is that a
finance minister is only as good as the support he receives from his president,
and in Mr. Levy’s case, it is half-hearted.
Even then, Mr. Levy will face widespread opposition from many within the
government and the PT structure. Mrs. Rousseff
has never been a political operator by choice, nor is she the PT leader (former
president Lula is). The PT will let the
new minister work only if it views it as its salvation. Since the PSDB will not morph into the PSDB
or a Brazilian version of Germany’s CDU, skepticism is allowed.
Mr.
Levy comes in with a strong resume. He
is technically a Chicago Boy having earned his PhD in economics there. He has
broad experience, having worked at the IMF, the IADB and the ECB. From 2000 to 2003, he worked at the Ministry
of Finance of then President F. H. Cardoso.
He has also been Finance Secretary of the State of Rio de Janeiro, and
more importantly Treasury chief from 2003 to 2006 under President Lula da
Silva.
That last job came at a crucial moment in Brazilian political and economic history. President Lula’s election had just caused financial markets to tumble on the expectation of rising social spending and out of control public sector growth. And markets had every reason to worry. Mr. Lula had campaigned as an angry populist in 1988 and again in 1998. In 2003, he succeeded President Fernando Henrique Cardoso who had stabilized the economy after two decades of crisis, yet barely avoided a financial panic in 1998-1999[1]. It was a close call but orthodox economic and financial policies prevailed in 2003, for two reasons. First, President Lula couldn't hope to carry out his social reforms if he had a major crisis on his hands (and that was what the markets expected). Second, the global commodity boom had not started yet and Brazil didn't benefit from an influx of foreign direct investment in mining or oil and gas, nor from the export revenues from these products.
Credit
then Minister of Finance Palocci and Treasury chief Levy for convincing
President Lula to adopt and stick to orthodox financial policies.
I
wrote this rather long introduction for two reasons: 1) to show that Mr. Levy
is eminently experienced and capable and in no way a political crony, and 2) to
show that there are similarities between the economic conditions of 2003 and 2014
that led populist left wing presidents to choose economic orthodoxy.
Then
and now, Brazil was facing challenges, then and now the elected president needed
to (re)gain credibility. Initially,
Minister Levy will benefit from the support of both the PT leader (ex President
Lula) and current President Rousseff. But
to what
If
history is any guide, Minister Levy may propose tax increases as well as cuts
in public investments and even social programs.
He already suggested that the National Treasury shouldn't finance itself
at 11.5% p.a. (Selic short-term rate) to fund BNDES loans at less than half
that rate. I have always found this
policy highly destructive, akin to a driver stepping on both the brakes and the
accelerator at the same time. I hope he
succeeds.
Already,
the Brazilian stock market has fallen in fear of potential tax increases. Likely financial tightening will reinforce
that trend. He will also have to contend
with the new Planning Minister, Nelson Barbosa, a firm believer in the
government intervention (and money) to foster economic development. As for the PT, given the already excessive
level of inflation, Mr. Levy can expect a battle royale when the time comes to
set minimum salary increases and social program budgets.
The
current economic climate will allow Minister Levy little leeway. Falling commodity prices have hurt the trade
balance: for the first 11 months of 2014, Brazil registered a trade deficit of
$4.2 billion, the worst since 1998. In November
2014, exports fell 25% compared to their November 2013 level. On the import side, both consumer and capital
goods fell but purchases of oil derivatives and lubricants rose.
The
situation is hardly better on the domestic front. The latest forecast of the central government
is for a 2014 primary budgetary surplus of 10 billion reals, or some 0.2% of
GDP. This is less than the previous goal
of an 80 billion reals surplus and is contingent on amending post facto the
budgetary law to, in effect, lower the bar.
The government is currently encountering difficulties in having such
amendment voted and is offering congressmen supplemental discretionary budgetary
allocations in exchange for their vote...Minister Levy is on record that he
wants to raise the primary surplust to 1.2% of GDP in 2015 and eventually to 2%.
As
if it weren't enough, Minister Levy will also have to deal with the Petrobras fallout. That is because the company is not only
overly indebted (at around $170 billion) but since it is unable to publish
audited financials due to a major corruption scandal, it will likely need to
borrow from BNDES. Making a bad
situation worse, falling oil prices will squeeze the company and all this will call
for drastic action and reform. Minister
Levy is likely to ruffle, not to say scorch many feathers in the process.
As
much credibility as the new minister enjoys, Brazil needs to make profound
changes to return to sustainable economic growth. These include shrinking the public sector,
undoing the de facto nationalization of Petrobras, Eletrobras and to some
extent, of Vale. Brazil also requires a
greater opening of the economy to foreign competition. Without them, gross mis allocation of capital
and endemic corruption will hold Brazil back.
Such reforms are political in nature and go far beyond the competency of
the Minister of Finance.
What
does the future hold for Minister Levy?
Given
the mounting size of the Petrobras scandal and its likely extension to other
state-controlled companies and sectors, and the revelation that these money
schemes benefitted the PT so much as to call into question its legitimacy and
that of President Rousseff’s reelection (a charge already made by opposition leader A.
Neves), Mr. Levy will find some initial freedom of action. It could last a couple of years, but beyond
that?
Mr.
Levy’s remedies and policies, while appropriate, are the exact opposite of what
the PT wants and what President Rousseff has supported in the past. He can help
with emergency measures while offering deniability: after all, he is not a PT
member or “even” a politician but a technocrat.
But once the worst is avoided, policy choices have to made, which by
definition are no longer life and death decisions but political choices.
Perhaps
the one important unknown is what former President Lula has in mind. His health seems good, and like his Uruguayan
homologue Tabare Vasquez, he may want to seek reelection. If this is the case, and given that another
commodity boom doesn't look imminent, Mr. Levy may have more time and support to reform Brazil.
[1] That was caused by the Asian Crisis but also
by the incendiary campaign speeches of presidential candidate Lula da Silva.
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