SEMINAR

Gloomy prospects for the economy IBRE staff discusses prospects for the Brazilian economy in a time of transition.

Solange Monteiro

Several economic indicators worsened in the third the scenario for the construction sector is critical”; quarter, as did the confidence of entrepreneurs she said IBRE is projecting that fixed investment in and consumers in the economy. That will no will end the year at 17% of GDP compared to doubt heighten the challenges for the president 20% of GDP in 2011. who is sworn in early next year. In the Economic Aloisio Campelo affirmed that certain sectors Analysis Seminar organized by the Brazilian Institute of the economy had seen some improvement in of Economics (IBRE) in mid-September, IBRE activity in the third quarter. But, he warned, “This researchers expressed considerable concern about seems more related to the normalization of working the current situation of the economy. “There was days, after the period of the World Cup holiday.” some expectation of economic recovery after the Consumers were concerned with uncertainty World Cup, but pessimistic expectations proved to about employment considering how few jobs be stronger, “said Samuel Pessôa. “The difference were created. Castelar pointed out that reduced is that now there is no global credit implied a decline in activity crisis to justify our internal crisis,” in such labor-intensive sectors commented Armando Castelar as construction, commerce, “Now there is no global Other indicators reinforce and financial intermediation, the pessimism. “In the second crisis to justify our which should affect employment quarter the service sector, for internal crisis.” heavily. example, contracted by 0.5%. Castelar also identified a fall This has only happened twice Armando Castelar in confidence in both public in the last eleven years,” Regis and private banks: “In the last Bonelli said. Domestic savings 12 months, private bank credit have been declining since 2011 and are now down adjusted for inflation declined, as was seen at the to 13% of GDP from 19% of GDP in 2011. The height of the crisis in 2009.” He believes that in order savings drop and a fall in investment by 5.3% in the to ensure GDP growth in 2015, whoever is elected same period confirms the severity of the country’s president will have to win back the credibility financing needs. Silvia Matos explained that “Our of both consumers and markets. “Today we are projection is that fixed investment will fall by 7.9% in growing as little as in 2009, but with much higher 2014. Surveys show that the manufacturing sector inflation and external current account deficit. This intends to invest little in the next 12 months, and implies a non-trivial cyclical adjustment.”

October 2014 Ÿ The Brazilian Economy 37 SEMINAR ECONOMY

What to expect for 2015? •• A tighter fiscal policy

•• Fiscal primary surplus of 1.1% (compared to 0.2% in 2014)

•• Interest rate of 12% a year

•• Exchange rate of 2.45 reais per U.S. dollar

•• Increase of 7.45% in controlled prices

•• GDP growth of 1.2%

•• Inflation of 6.1%

Source: IBRE/FGV.

As for monetary policy, José and in 2002 Julio Senna signaled concern “Our projection is that raised interest rates twice; and increased about market expectations that fixed investment will fall the presidential candidates will interest rates from 10.75% to not raise interest rates. “I think the by 7.9% in 2014. … The 12.5%,” he said. market is buying the presidential manufacturing sector argued for candidates’ speeches,” Senna caution on interventions to intends to invest little said, indicating that usually a contain depreciation of the new administration would do in the next 12 months, real. In his view, Central Bank the opposite. “There is no way and the scenario in the interventions in the exchange out given that Brazil has a flexible market have been higher exchange rate. That was the case construction sector is than would be desirable and with Arminio Fraga in 1999, when critical.” somewhat precipitate. Based on he raised interest rates from the nominal exchange rate since Silvia Matos 39% to 45%; the beginning of the Real Plan in

38 October 2014 Ÿ The Brazilian Economy SEMINAR ECONOMY

1994, Barbosa estimates that the long-term average However, we have a complicated political economy exchange rate at 2.50 reais per U.S. dollar, adding, and the fact is that over the past three years “This means that the Central Bank the fiscal primary surplus has sold 25% of Brazil’s international deteriorated,” Pessôa noted. reserves in the form of swap IBRE estimates that the 2014 operations, but the exchange “Central Bank primary surplus will be 0.2% of rate did nothing more than interventions in the GDP—far below the government return to its long-term average.” exchange market target of 1.9%. What is the actual On the fiscal side, economists margin for fiscal adjustment pointed to the problem of have been higher than is an issue that generates maintaining government would be desirable and controversy and will certainly consumption when there is depend on the preferences of somewhat precipitate.” no room in the budget. From the president elected. Between January to July, the primary Nelson Barbosa reducing subsidies, eliminating surplus was R$24.7 billion, tax exemptions, and greater fiscal the lowest since the Fiscal effort, IBRE researchers estimate Responsibility Law was enacted in 2000. “On the that a primary surplus of 1.1% in 2015 is possible. one hand, the voter wants more consumption and “If we do everything right we will work with lower more public spending. On the other, it is hard to interest rates and this will give us a chance to think how rising spending can continue,” Barbosa improve domestic savings and seek an adjustment said. “We cannot deny that there has been some of the economy that leads us to another period of control of administrative and personnel expenses. growth,” Pessôa concluded.

The BRAZILIAN ECONOMY

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