On the 21st December, Brazil’s new Finance Minister Nelson Barbosa stepped in at amidst the deepening of political and economic turmoil. Barbosa may be the person that fixes Brazil’s finances, soaring inflation and revive the sinking economy. But the big question remains as to whether Barbosa can adopt the previous Finance Minister’s levy of austerity. With the Ibovespa index tanking to a six year low, investors fear that he will adopt looser fiscal policy.
Brazil currently holds 58.63% of its GDP as debt and has suffered from slumping commodities prices, which was Brazil’s biggest export weapon. The price drop is widening the trade deficit and pushing the annual inflation rate up to a record level of 10.71%. According to the IMF, who forecast the country’s economy may shrink 0.3% in 2015 before rebounding in 2016 to grow at a meagre 0.8%.
Given the sheer size of the budget deficit that the government is grappling with (currently 9.5%of GDP), a move away from austerity is likely to rattle investors. Analysts forsee Barbosa intending to continue the austerity plan, with the challenge he would face being passing such reforms through Congress and Rousseff’s cabinet. If Brazil’s economic woes were not enough to contend with, there is an issue of the impeachment of President Rouseff violating budget laws, by increase spending during her 2014 re-election campaign.
The Austerity Plan
Levy had trouble persuading Congress and Rousseff’s cabinet to adopt large parts of his austerity plan, which is said was a key to revive investor confidence. While levy succeeded in wining congressional approval for some tax increases and spending cuts. On other hand, Barbosa is associated with less fiscal discipline and enjoys Rousseff’s support for lower budget surplus before interest payments.
“I am not saying Barbosa will be fiscally irresponsible, but probably he does not have the keen sense of urgency that the authorities need to turn around the fiscal very quickly”
Alberto Ramos, Chief LatAm Economist, Goldman Sachs
Barbosa tried to dispel the view and said;
“Today our biggest challenge is fiscal which is totally up to the Brazilian government to resolve”
Many investors are now asking themselves as to whether Barbosa can steer Brazil out of the recession when Levy, an experienced University of Chicago- trained economist could not. But according to few analysts, a good austerity plan can help Barbosa bring Brazil back on track for growth.
In many ways, Levy’s task was daunting from the moment he took office. Not only was the country already sliding into recession but a corruption scandal emanating from the State run oil giant was spreading fast. A similar situation is happening with Barbosa following the Petrobras scandal, with Eletrobras. An internal probe into the Eletrobras investigation has swelled to involve more than 100 investigators. It remains to be seen as to when Brazil will overcome its political and economic issues to restore its growth potential.