Brazil’s New President Settles In

The Economist’s review of the new Rousseff administration raises questions about the South American giant.

“Ms Rousseff is to keep as finance minister Guido Mantega, who has been in the post since 2006. He is from the PT’s “developmentalist” wing, which sees a big role for state-owned companies and government intervention. During the credit crunch he ramped up public spending. As the election approached, the rise in spending continued (federal spending has increased by 27% so far this year), justified as pro-development rather than counter-cyclical. There was also some creative accounting, as government loans were channelled through the National Development Bank (BNDES) to keep them off the books.”

“Under Lula, Mr Meirelles enjoyed operational independence to set interest rates. Ms Rousseff recently declared that by 2014 she wants to see the benchmark interest rate fall to 2% in real terms (it is currently 10.75%, or 5.3% stripping out inflation). Doing that without scrapping the inflation target requires much tighter fiscal policy. Mr Mantega this week promised to comply: “2011 will be a year of fiscal restraint,” he said, adding that the government will reduce its loans to the BNDES.”

The Economist has covered BNDES closely in the past year, including at least one piece that suggested that the State Development bank required greater transparency. At the same time as the American Fed has been pumping cash into the American economy like a doctor pumping adrenaline into the veins of a 100-pound overweight heart attack victim, the Brazilian government has been pumping cash into the Brazilian economy through BNDES loans.

The Economist further points out:

“It was Mr Mantega who in September coined the phrase “currency war”; he has also criticised loose monetary policy in the United States for driving money to places like Brazil. His response has been to triple a tax on foreign purchases of Brazilian bonds. By stopping the real from rising further that may have bought time. But the tax has had unintended consequences: the treasury is now struggling to find buyers for long-term bonds, which tend to be popular with foreigners.”

A few weeks ago, the chatter among my hedge fund manager correspondents was of “currency wars.” It seems, that even with the tariff at 600 basis points (up from 200 basis points a year ago), the demand for Brazilian Government bonds is weak.

One wonders whether the financial press will give Mr. Mantega such gushing coverage if his organization announces that the Brazilian government has reduced its tariff on foreigners buying Brazilian debt? A year ago, The Economist warned that the greatest risk of the Brazilian economic miracle is hubris. That hubris could be tracked in the rate of this tariff for foreigners on Brazilian Government debt, and in the rhetoric of Brazil’s central bankers about American Quantitative Easing.

Published by Janar Wasito

Janar Wasito is the manager of Magis Capital in San Diego, CA. He is a graduate of Harvard and Stanford Law School, and a former Marine Officer.

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