Brazil finance minister vows ‘fight to the end’ to save reforms

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

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

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

Brazil’s economy is expected to grow by just over 5 per cent this year, more than recovering a 4.1 per cent contraction last year and outperforming most of Latin America, thanks to one of the developing world’s biggest government stimulus packages.

Guedes said the country had entered a “V-shaped” recovery and would grow as much as 2.1 per cent next year, aided by investment commitments from the private sector of more than $100bn.

He dismissed forecasts from local banks that recent aggressive interest rate rises by the central bank to combat inflation and growing market turbulence ahead of the October 2022 presidential and congressional elections would cause the economy to stagnate or shrink.

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

“It is more likely that Brazil has some growth and resilient inflation [next year] than lower inflation and no growth”.

A University of Chicago-educated former investment banker who studied under Milton Friedman, Guedes won acclaim from the market when he took over at the head of a “super-ministry” combining several departments in 2019.

Investors liked his ambitions for big structural reforms, his stress on fiscal rectitude and his promises to rein in Brazil’s ballooning public debt. But after some successes such as cutting the cost of government pensions, privatising around 200bn reais ($35.6bn) of assets and granting independence to the central bank, Guedes’ commitment to fiscal discipline is now in doubt.

The Bolsonaro administration is pursuing congressional approval for a constitutional amendment that would bypass a mandatory spending ceiling in order to help pay for enhanced cash handouts to 14.6m of Brazil’s poorest families ahead of the election.

The legislative manoeuvre prompted several key officials from the finance ministry to quit last month and triggered a sharp market reaction that pushed Brazil’s real down to near-record lows of 5.5 to the dollar.

Guedes denied that Bolsonaro’s new cash transfer programme, Auxílio Brasil — which he describes as a “Milton Friedman minimum income concept” — was a sign he had abandoned fiscal rectitude.

“They put pressure on me [saying] ‘Oh, Paulo Guedes is becoming a populist’. No, it’s this,” he said, gesturing to a ministry projection showing government spending falling to 18.4 per cent of gross domestic product next year with the spending cap breached, instead of a previously forecast 17.5 per cent. “We are talking about a deceleration of the fiscal speed of adjustment.”

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

Wall Street economists are not convinced. “The recent budgetary developments have significantly eroded the credibility and effectiveness of the main fiscal anchor, the constitutional spending ceiling,” said Alberto Ramos, chief Latin America economist 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 on the economy, who was convinced he would be a powerful minister under the Bolsonaro government. But it turned out that politics have prevailed and now he is a lame duck”.

Cutting a more lonely figure after the departure 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” of passing tax reform,” he said. When it comes to the sell-off of Eletrobrás, Latin America’s biggest electricity company, “we are going to fight until the last day”. On changes to the contracts of new government employees “we will fight till the end”.

But many of the initiatives are stuck in congress and analysts believe that with an election looming and his poll ratings sagging, Bolsonaro will not expend valuable political capital on potentially unpopular projects.

Despite the headwinds, Guedes remains bullish, saying investors have failed to recognise 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 going private sector growth — it’s decentralising, it’s pervasive, it’s all over. It’s wind [power], oil, natural gas, electric, cabotage, railroads, airports, seaports, it’s everywhere.”

As for the centre-left opposition, “they keep hitting their drums [saying] ‘This year is going to be a collapse’. No collapse . . . ‘Next year is going to be a disaster’. Forget about it. It will not happen.”

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