Brazil’s Surreal Salvation Script

Brazil’s currency and capital markets careened as the central bank after official and exporter hectoring abruptly slashed the benchmark interest rate 50 basis points and raised the inflation forecast to 5 percent as GDP growth expectations were pared to the 4 percent range, despite upbeat labor and retail indicators. The Rousseff Administration had already been criticized for a stream of cabinet departures which has conveyed endless reshuffling and seeming contradictions between commitments to restore a 4 percent of GDP primary fiscal surplus and launch new industrial policy measures including trade restrictions and targeted credit to help designated sector competitiveness. Governor Tombini couched the turnaround in terms of a revised policy methodology according greater weight to the deteriorating global economic outlook, but many investors who have pared debt and equity positions following the Finance Minister’s serial imposition of taxes fretted that the government’s short-term popular overtures had again held sway, and that the monetary authority had relinquished a longstanding autonomous and liberal reputation. They note that full currency convertibility has disappeared from the agenda and that the body was silent on a proposal to gather other BRIC members in a European-bond buying operation when the domestic debt level is still steep and even the most conservative foreign players, the Japanese investment trusts, are reducing exposure. Banks, in particular, have been shunned on the exchange as NPLs creep over 5 percent with many listings off 25 percent as macro-prudential limits on credit card issuance go into effect with repayment burdens eroding household spending power. In the space, BTG Pactual however generated excitement with a plan to go public and expand cross-border through tie-ups with Chilean and Colombian brokers. Skeptics fired back that numerous IPOs have been withdrawn in recent months and that the move outside Brazil could also be to escape worsening asset management and underwriting foundations.

Neighboring Argentina has frowned on the possible real-weakening impact and Mexico has also hinted it could cut rates as both countries head into their own presidential election cycles. In a national primary Argentine incumbent Fernandez took a commanding 50 percent after earlier provincial setbacks, paving the way for a cinched second term despite relentless capital flight and inflation. With pre-poll budget outlays increased 30 percent, tariffs have just been raised against Brazilian goods to win voter support. Mexican Finance Minister Cordero has quit to seek his party’s nod although the once dominant PRI is set to return to power, according to current opinion readings. In the 2012 fiscal blueprint just submitted no major tax reforms are contemplated even as the US-linked security and export design remains sketchy.