Brazil’s New Finance Minister Faces First Challenges

By Lise Alves, Senior Contributing Reporter

SÃO PAULO, BRAZIL – Joaquim Levy took over as Brazil’s new Finance Minister on Monday, January 5th, and announced that balancing public accounts is an essential condition for the country’s sustainable development and social economic growth. However, with the current economic state of the country, this will not be an easy task.

“The fiscal balance is indispensable to expand opportunities for the population, especially the youth,” he said in his first speech as Finance Minister, adding that the balance of the accounts “is key for the growth of credit which allows businessmen to invest and generate jobs.”

Levy did not discard the possibility of increasing taxes to obtain the much sought of balance in public accounts. “Possible tax adjustments will be considered, especially those used to encourage domestic savings and correct tax unbalances between sectors,” he explained.

He also said that any tax adjustment will be coherent with public spending trends and that the government will not seek to render benefits which will generate significant tax breaks for a specific segment of the economy “no matter how attractive [the segment] is.”

In November when he was announced as President Rousseff’s new Finance Minister, Joaquim Levy said he would establish the primary surplus target at 1.2 percent of the GDP for 2015 and at least two percent of the GDP for 2016 and 2017. But balancing public accounts and meeting the primary surplus target this year will not be an easy task for the government’s new economic team. The latest data for 2014 is not very encouraging.

Inflation, for example, should not meet the established 4.5 percent target center for the fifth consecutive year in a row. Accumulated inflation from January to November of 2014, according to the Brazilian Institute of Geography and Statistics (IBGE) was at 5.58 percent and the twelve-month inflation (from December 2013 to November 2014) was at 6.56 percent, higher than the ceiling of the target (6.5 percent). The final inflation index for 2014 has not yet been released, but market forecasts show that it will be close to 6.56 percent.

The Selic (benchmark interest rate), after reaching 7.25 percent per year at the end of October, ended 2014 in the two-digit level, at 11.75 percent. The level at the end of December was the highest in nearly three years and is expected to rise even further during the first semester of 2015 before stabilizing.

Another negative result comes from the trade balance, where in 2014 Brazil will register its first deficit since 2000. Imports surpassed exports in the first eleven months of the year by more than US$ 4.2 billion.

Other economic indicators also signal a tough year ahead. The net debt of the public sector, after four years registering declines, increased once again in 2014, totaling (until November) at 36.2 percent of the GDP, in contrast to 33.6 percent of the GDP in 2013. Investment rates remain stagnant with the Gross Fixed Capital Formation (index which shows how much of the new value added in the economy is invested rather than consumed) below 19 percent, lower than the world average.

The foreign exchange rate surged during the second semester of 2014, closing above the R$ 2.70/US$ rate on several days and appreciating more than 12.5 percent during the year.

But not all sectors of the economy are in negative territory. Despite the troubling economic indexes, the labor market continues to show positive results. Unemployment rates continue to decline and although formal employment (those with contracts) grew less in 2014, the IBGE shows that in the six largest metropolitan areas of Brazil rates are some of the lowest ever recorded.

Analysts predict a very difficult and turbulent year for Brazil’s economy, but if most of the plans defined by Finance Minister Levy are implemented, the country may see a more stable and sustainable economy starting in 2016 and 2017.