Dilma Rousseff has chosen to follow the logic of markets. The unique certainty now is the adjustment; other items remain unclear
By Pedro Henrique Evangelista Duarte, Professor at the Business, Accounting and Economics College from the Federal University of Goiás
After a long cycle of growth and relative financial stability, in 2014 the Brazilian economy has shown clear signs of slowdown, with rising inflation and negative growth that officially signalled a technical recession. The latest financial troubles began to take shape in 2008, following the global crisis and while it was predicted that the presidential election would create a lull in Brazil’s economic growth, the situation has proved worse than many expected, but why?
Officially, the federal government points to three main explanations for the economic slowdown. First, there is the effect of the international crisis, especially on the economies of the United States and China, the main importers of Brazilian commodities. Moreover, the drop in the price of Brazilian products led to a fall in the national reserves accumulation, which is essential for exchange rate stability.
Second, the World Cup. Although it was expected to create an overall increase in consumption, the consecutive holidays on match days had adverse effects on production and trade across the country.
Finally, the presidential elections created an unwanted sense of uncertainty in the market, which led to the reduction of private investment and delay decisions until there was a clear position of the new President of the Republic about the conduct of economic policy.
In reality, the governmental evaluation proves to be far too simplistic, as if there had been no political mistakes in the conduct of national economic policy that could more directly explain the deceleration of Brazil’s development.
Above all these reasons given by the government is the exhaustion of a growth expansion model focused on increasing domestic consumption. There is no doubt about the importance of raising the minimum wage policy, maintained since President Lula’s government, and social programs. Problems have arisen in several areas including, in the incentives to certain industrial sectors, with no articulated planning of industrial promotion. While a relatively long period of consumption has sustained economic growth, it has now reached its limits and Roussef’s government was slow to recognise this.
The result is what we have: slowing growth and rising inflation, albeit maintaining low unemployment and population income level. As if it was not enough, the investigations over Petrobras, the largest Brazilian company, consolidate investors’ notion of uncertainty.
What to expect in 2015
During the presidential election campaign Argentine news portal Notes, interviewed the economist Marcelo Carcanholo, who was asked about the differences between the candidates Dilma Rousseff (PT) and Aécio Neves (PSDB) in the management of the economy, and replied “no matter who wins, the adjustment will come”. This adjustment is probably the only certainty for all Brazilians in the beginning of the new political-economic cycle in the country. It is certainly great news for some and problematic for others.
But first we must recognise the economic policy of Roussef’s Workers Party. Strictly from the point of view of its central core, the Lula and Rouseff governments maintained the same scheme consolidated by Fernando Henrique Cardoso, president from 1994 to 2002 by the Social Democracy Party: the “macroeconomic tripod”: primary surplus (to pay debt interests), floating exchange rate and inflation targets.
Based on the neoliberal ideology, this policy promotes a number of moorings in the management of the economy, always in favour of market interests. In other words, all efforts are focused on the attempt to maintain a stable environment for the large financial capital, since this is responsible for investments. If the international economy is favourable – as it was during the years of the Lula government – progress in other areas is promoted. Otherwise, the efforts will be for stability with no question, whatever the costs are.
When she announced the names of her new economic team, Dilma Rousseff sent exactly that message: the market requires stability, so let’s get into a cycle of adjustments. The next Ministers of Finance and Planning – Joaquim Levy and Nelson Barbosa, respectively – are typical representatives of the market and have already sent laid out their plans: the focus of the next three years will be to increase the primary surplus and reduction of public expenditure. Compared to other economic and social aspects, the debate was left wide open: what we can do, will be done.
Looking at the economic game, you can tell that Rousseff not only gave the response required by the market but also to those on the right. Not that PT can still be considered in fact a leftist party. The point is the choice of names that preach a kind of opposite economic policy to that promised by the incumbent president and the PT itself during the election campaign.
For Brazil’s economy to return to growth, there is no doubt that the key would be the change in economic policy. From a critical perspective, however, there are two essential steps that must be taken in any economic policy. First, a civil audit of public debt to allow the end of the payment of external debt is required as stopping these payment schemes, considered abusive by some would represent savings of millions of dollars every year, since it would end the primary surplus obligation. Second, the construction of a coordinated industrial policy for new development project for Brazil is essential.
The government, however, opted for the logic of markets. So, the only certain thing now is the adjustment; the other items remain under a dark aura. We cannot know what will happen in 2015.
Who pays the bill?
In countries like Brazil, where the dependency is the central feature of economic relations, there is no doubt that it is the working class who will end up pay for financial stagnation. Adjustment is synonymous with reductions in public spending, reduced investments, and repression of the minimum wage. As the saying goes, “the rope always breaks on the weaker side”. Not surprisingly, the main trade union of Brazil, which maintains its political articulation with the government, pointed out that a solution to the crisis would be the momentary reduction in wages. Reduce wages, of course, because the reduction in profit rates is never placed in extensive discussion.
Brazil is therefore facing a context of uncertainty. Given the Dilma Rousseff’s choices, expectations are not the best possible.
NOTES AND INFORMATION
2015 Budget
The Budget Committee of Brazil’s National Congress approved the final report of the Budget Guidelines Law (LDO, in Portuguese) for 2015 on 10 December, this will form the basis for the Federal Budget. Deputies and Senators from all parties reached an agreement to try to vote on the 2015 Budget in Congress until the month of January.
Fiscal targets
Following pessimistic economic projections, the report reduces the primary surplus target to be met by the federal government – from 86 billion reais to 55.3 billion reais. Adding the fiscal target of 11 billion reais for states and municipalities, the primary surplus target for the public sector is 66.3 billion reais, which is equivalent to 1.2% of Brazil’s gross domestic product (GDP), considering expansion of 0.8% for the Brazilian economy in 2015.
Public debt
The primary surplus corresponds to the economy for the public debt payment – which corresponds to government borrowings from public or private financial institutions, in the internal or external financial market, as well as with companies, national and international organizations, individuals or other governments. According to the Citizen Audit of the Debit association (Auditoria Cidadã da Dívida, in Portuguese), gross external debt exceeds 540 billion dollars and domestic debt in titles issued by the Treasury spends 3 trillion reais.
‘Manoeuvre’
A day before the approval of the final report of the LDO 2015, Congress concluded the vote on the bill 36/14 amending the calculation of the primary surplus in order to enable the government to achieve fiscal balance target of the year. The government announced that it is seeking a primary surplus of at least 10.1 billion reais in 2014. From January to September, however, the result of the government’s public accounts registered a deficit of 15.7 billion reais.
Glass ceiling
The opposition, especially the Social Democrats (PSDB), has heavily criticised what they called “manoeuvre” of the federal government. The change in how the government can meet the primary surplus targets, however, is not new in the budget legislation. The first occurred in 2001, with Fernando Henrique Cardoso (PSDB). There were also changes in surplus in two years of the second term of former President Luiz Inacio Lula da Silva (PT): in 2009 and 2010.
Drop in revenue
In the last 12 months, a number of tax concessions handouts for banks and large companies, including multinationals, were mainly responsible for the drop in tax revenues in 2014 – which forced the federal government to abandon initial primary surplus target of 99 billion reals. Counting tax exemptions for business sectors, the figures exceed 84 billion reais in 2014; in 2013 was 77 billion reais.
Meanwhile, banks…
Such largesse, combined with the low economic growth, contributed to the deterioration of the fiscal situation of Brazil. Additionally, the accelerated issuance of public debt, with rising interest rates, has led to an increase in the debt stock and the requirement of funds for the payment of interest. Even in this scenario, the profit of Brazilian banks in 2014 should be better than in 2013: 73.5 billion reais.
Paradise?
Following the prescription made by financial institutions and credit rating agencies, Brazil appear for the fifth consecutive year, among the five countries with higher primary surpluses in the world, according to available estimates. Added to higher real interest rates in the world, of 4.68% per year after discharge from the Selic (basic interest rate stipulated by the Central Bank) to 11.75%, and will be what may be called paradise for bondholders of public debt.
Back to the budget
The Annual Budget Law Project for 2015 predicts a total expense of 2.8 trillion reais. Of this amount, 1.3 trillion reais, or 47%, are for the payment of public debt interests. This value is 13 times more than the resources earmarked for health, 13 times more than the resources for education, or 54 times the resources to transport.
Minimum wage
According to the budget, the minimum wage in 2015 will be 788.06 reais per month. The figure represents an increase of 8.8% compared to the current 724 reais. The impact on public finances will be 22 billion reais. But, taking into account the constitutional provision which states that the minimum wage should be sufficient to meet the expenses of a worker and his family with food, shelter, health, education, clothing, hygiene, transportation, leisure and security, the correct value would be 3,000 reais, according to Dieese research.
Latin America and the Caribbean
According to the Economic Commission for Latin America and the Caribbean (ECLAC), GDP growth in the region will be 1.1% in 2014, rising to 2.2% in 2015. For ECLAC, Brazil will grow 0.2 % in 2014 and in 2015, 1.2%. The Economist forecasts growth of 2.8% for Latin America in 2015, while the projection for Brazil’s expansion of 1.8%.
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