BRASILIA, (Reuters) – Creativity and improvisation have long been the most celebrated trademarks of Brazilian soccer teams.
For governments, though, those traits are less desirable. President Dilma Rousseff’s willingness to make sudden, unexpected changes to economic policy is becoming one of the biggest risks of doing business in Brazil, a trend that officials tell Reuters is likely to continue in coming months.
In the last two months, Rousseff’s government has shaken foreign investors with numerous policy shifts, including:
* A surprise interest rate cut on Aug. 31 that is still reverberating in markets, making Brazil’s real one of the world’s worst-performing currencies since.
* A reduction in the percentage of ethanol mixed into local fuels, the timing of which unsettled biofuels companies and led to an increase in gasoline imports.
* A 30 percentage-point increase in a tax on imported cars, which virtually overnight priced many vehicles out of the Brazilian market and forced auto manufacturers from China and elsewhere to rethink local investments.
Looked at in isolation, some of the measures have barely caused a ripple outside their respective industries. But taken together, they suggest a mounting risk in Brazil that business plans can be turned upside-down with little to no notice, if Rousseff’s government finds it convenient. Officials on Rousseff’s economic team, speaking on condition of anonymity in order to frankly discuss policy, said fast, flexible action has been essential to protect Brazil from the ever-changing effects of the global financial crisis.
They say the relatively ad hoc approach is likely to continue in the medium term and one official said the degree of policy uncertainty was “miniscule” compared to the “chaos” in Europe and the United States.
Rousseff’s poor relationship with Congress makes it very difficult for her to undertake the kinds of structural reforms that could meaningfully reduce above-target inflation, for example. That leaves her with little choice but to pursue measures such as the ethanol rule that do little to solve the core problem, but might shave a tenth of a percentage point or so off headline inflation by the end of the year.
“It’s not the best way to make policy … but these are the tools we have available to us,” a second official said.
One new step under consideration is the more vigorous sale of government stocks of foodstuffs such as rice and beans to help keep food prices down and, perhaps, ensure that the IPCA consumer price index ends the year below the government’s 6.5 percent target ceiling. The IPCA stood at 7.31 percent in the 12 months through September, a six-year high.
“You’ll probably see more measures like this in coming months,” the official said.
MOVES COULD BACKFIRE
Rousseff’s improvisational approach contrasts with recent years, when economic policy in Brazil was prized above all for its boring predictability.
Her predecessor, Luiz Inacio Lula da Silva, had little choice but to be conservative. His past as a labor union leader and one-time radical meant that investors were ready to revolt at the first sign of unconventional economic policies, especially at the beginning of his presidency. Lula’s consistency through eight years in office helped make Brazil a star among emerging markets, although he became slightly less conventional toward the end of his presidency. His solid record also arguably gave Rousseff, his chosen successor, more room to maneuver since she took office Jan. 1
Unlike Lula, who didn’t finish elementary school and delegated many policy matters to his top aides, Rousseff is a trained economist who officials say has been personally involved in almost every major economic decision.
Her record, so far, is mixed. Brazil’s economy has to date escaped the worst of the global financial crisis. Unemployment is near all-time lows, and her popularity has remained high at about 70 percent.
Yet gross domestic product is likely to disappoint this year, with growth expected at around 3.5 percent. That is below its peers in the BRICS emerging markets group — China, India, Russia and South Africa — and most big economies in Latin America.
Rousseff’s recent policy measures appear designed to ensure that Brazil’s economy continues growing at a healthy pace and avoids the stagnation seen in rich countries, says Zeina Latif, chief Latin America economist for RBS.
“They recognize that it’s not all about textbooks and models when it comes to the economy,” Latif said.
However, she also warned that a constant drip-drip of new measures can also create confusing new obstacles to doing business in an economy that is already highly regulated and taxed by emerging market standards.
“We already have layers upon layers of distortions in Brazil,” she said. “The risk here is that by intervening, you ultimately end up constraining economic growth.”
CHINESE ANGERED BY MEASURES
Rousseff and her finance minister, Guido Mantega, have repeatedly avowed their commitment to the so-called “three pillars” of Brazil’s economic boom since the 1990s: a floating exchange rate, inflation targeting and fiscal responsibility.
Yet, in practice, Rousseff has essentially sacrificed this year’s inflation target for the sake of maintaining economic growth. The central bank has established a de facto currency band of between 1.55 and 1.90 per dollar by intervening in the foreign exchange market or creating new capital controls when those extremes are threatened.
Rousseff’s fiscal record is very solid. But the government’s penchant for intervention is leaving a growing trail of angry business leaders and officials. Chen Jian, China’s vice commerce minister, reportedly warned in Geneva last month that foreign companies could stop investing in Brazil if it adopted more measures like the car import tax. Brazilian officials say the move was necessary because other countries are manipulating their currencies to make their exports cheaper.
“No closed economy can grow, and it won’t get the dividends of development either,” Chen said, according to Brazil’s Agencia Estado. “(They) also run the risk of watching companies leave.”