Brazil is on the right track to recover from its worst crisis in a century, but needs to open its economy if it is to achieve long-term growth, said speakers at the annual assembly of the Latin American Banking Federation (Felaban) in Buenos Aires.
Economists from Banco Bradesco and Banco Safra shared a positive outlook for Brazil’s return to modest GDP growth in 2017 (around 1%) and 2018 (around 2.5%), as the country embarks on an ambitious reform journey.
Otavio de Barros, Bradesco’s chief economist, listed Brazil’s “original sins”, which include a lack of budgetary governance, acceptance of medium to high inflation (currently around 6%), and being one of the most closed large economies in the world. While the first two aspects are expected to be tackled in President Michel Temer’s reform plan, the opening of the economy does not appear to be an immediate priority.
“In the last five decades we have built a very potent economy and now it’s time more than ever to open the economy, gradually and by investing in bilateral and regional agreements. This is crucial to productivity,” said de Barros.
When a delegate asked about the potential for bilateral agreements with Argentina, the economist pointed out that Brazil only has three free trade agreements, namely with Egypt, Israel and Ghana, and that “Mercosur is a disaster”. “The only possible way forward is more collaboration between Argentina and Brazil, and the two governments are currently going in the same direction: this could mean a change in Latin America towards a more free market,” he added.
The Brazilian government recently received strong support from the lower house of congress, which voted overwhelmingly in favour of capping public expenditure over the next 20 years, meaning that spending will not be able to increase beyond inflation. While this still has to be fully approved by congress, it represents a constitutional amendment that would pave the way for other much needed reforms.
According to Carlos Kawall, chief economist at Banco Safra, 90% of public expenditure is currently mandatory, and 75% of this mandatory expenditure is a constitutional obligation. “The rigidity in expenditure comes from the constitution,” he explained.
After capping expenditure, Temer’s government is expected to tackle the social security system, starting with pensions in the first half of 2017.
“We’re still in intensive care: GDP is expected to fall by 3.5% in 2016. But now we have better doctors and the right diagnosis,” Kawall said.
Another aspect that is expected to help the country’s recovery is the change of strategy at BNDES, the development bank, which could lead to a drop in Brazilian interest rates (currently around 14%). The speakers explained that before 2008, government-owned banks represented about 35% of overall credit in Brazil, but after the financial crisis, they began a very aggressive expansion phase to reach the current market share of around 50%.
“The government lent around 9% of GDP to BNDES to fund its clients at subsidised rates. Such credit subsidies still cost 0.5% of GDP per year. As government funded companies at subsidised rates, it led the central bank to increase interest rates well beyond what it would have been. As this changes, BNDES will start to repay the government the debt it owes, and we will discover that market interest rate is lower than we have had so far,” Kawall said.
The country’s central bank recently announced its intention to ease monetary policy to reach single-digit interest rates by 2018.