Brazil’s Aggrieved Intervention Instincts
Brazilian stocks were off 10 percent into December as the main Latin American market laggards as Q3 GDP growth came in just over half a percent squashing the full-year forecast to the 1 percent range, and Finance Minister Mantega acknowledged the real’s “dirty float” on central bank intervention to maintain a 2.0-2.1 to the dollar band. Banks sold off as the government continued to urge lending with the benchmark interest rate brought down to 7.25 percent, with state-run units in particular still expanding corporate and consumer books while private ones concentrate on handling NPLs over 5 percent for the industry and cutting costs. Annual credit growth has cooled to a more sustainable 15 percent, but high double-digit borrowing rates have barely budged with officials and banking executives engaged in a cycle of recrimination over policy and return drivers. The same divide has extended to utilities, where electricity firms went bankrupt under existing operating and tariff structures and were rescued by public providers as President Rousseff ordered further cuts in charges to aid industry and consumers. Heavyweight shares Petrobras and Vale are also flailing with the uncertain global commodities picture and entanglements at home, including a huge back tax bill for the former and demands for infrastructure project support for the latter as World Cup preparations were found to be behind schedule by a visiting delegation.
The comparatively low Doing Business rank and investment ratio have raised doubts about the post-stabilization model, and were cited by Moody’s in keeping the current sovereign rating in place. It also stated that the interest-servicing burden at 15 percent of revenue and gross financing needs at 15 percent of GDP were “outliers” in its high-grade category. The primary budget surplus will be under the 3 percent target this year, and structural reforms to the pension and tax systems are proceeding slowly with the ruling party relying on multiple parliamentary allies for passage. However corruption convictions and prison sentences for associates of former President Lula may help purge the legacy of shady political dealings which resulted in regular cabinet turnover early in the administration’s term. Rumors now circulate about possible reshuffling of the economic team on signs of backtracking from initial tough trade and capital flow approaches. After complaints from neighbors as well as the US and Europe auto import and other restrictions may be loosened, while export credit and long-term borrowing controls and levies have been eased with the 6 percent transaction charge lifted for 2-year facilities.
The capital curb rethink may conform to the new IMF “institutional view” adopted after publication of a staff paper that urges measures be balanced and temporary and take into consideration multilateral spillover effects. They should be a last resort after normal macro-economic and prudential steps, and future work will focus on possible coordination of international standards instead of standard confrontation.
