São Paulo 2014 Blog: Panel - Brazil's Economic Outlook

By
Luisa Leme

Panelists talked about Brazil's credit rating, as well as forecasting economic adjustments possible in the next administration.

Speakers:

  • Marcelo Kfoury, Head of the Economic Research Department, Citigroup Brazil
  • Dalton Gardimam, Chief Economist, Bradesco BBI
  • Sebastian Briozzo, Director, Standard & Poor's
  • Adriana Arai, Managing Editor, Latin America, Bloomberg News (Moderator)

The panel began by addressing Standard & Poor's March 24 decision to downgrade Brazil's sovereign debt rating, pushing debate about the country's fiscal policies to the forefront. When asked about Standard & Poor's reasoning about the downgrad, the agency's director Sebastian Briozzo clarified the decison by saying it was based on a general and comprehensive analysis. "In specific terms, there are two important factors: Brazil was positioned two degrees above in its investment grading until yesterday. To continue like that, the degree of flexibility of the country's economic policy should be higher," said Briozzo.

He explained that having more flexibility in its economic policy is considered a fundamental factor for countries to minimize the impact of external shocks. Briozzo outlined as factors in the decision fiscal deterioration of Brazil, a fiscal policy lacking clear goals, the deterioration of the external sector with less foreign direct investment, and slow growth with the lowest product investments among emerging economies. He explained that "these factors decrease the government's degree of maneuverability, consistent with a lower investment grade." Briozzo reminded the audience that Standard & Poor's perspective is still stable, as "the agency continues to see Brazil as a government in an investment grade, but at lower standards than before." He said: "This is our opinion."

When talking about different scenarios for Brazil's economic policy depending on the election's outcome, Marcelo Kfoury of Citigroup Brazil emphasized that decisions based on polls should be taken with a grain of salt, as "the country is not in elections mood yet." He said that approval ratings for the government fell from 60 to around 30 percent during protests and stand at about 40 percent now. Kfoury said that what happens from here until the elections can determine President Rousseff's popularity closer to the elections, along with chances of reelection. He pointed to three risk factors for reelection: energy issues, the World Cup and related protests, and the economy. "Brazilian investors are more pessimistic. We believe there should be a more orthodox policy coming, with higher interest rates," he said. Citigroup forecast 2015 GDP growth at 1.8 percent. 

Dalton Gradimam from Bradesco BBI talked about experiments during the last four years in the Brazilian economic policy. For him, a crucial factor for the country's economic path was not lowering interest rates, but the size of public and private savings in the country, which decreased in the last years. "If it decreased, I can only think it will cause more pressure on investments and non-growth." Grandimam said that Brazil's economic outlook is less related to a new social pact or the last three years of governance, and more connected to structural issues, such as "the country's inability to save." He talked about subjectivity in agency's gradings and a market that will or won't prove these predictions. "We increased interest rates before other emerging markets like Turkey, for example. We were experimenting." He considered public debt as a crucial factor for the outlook, predicting a GDP growth at 1.5 percent in 2014 and 2015, independently of who holds the presidency. "There will be strong adjustments," he explained.

When debating Brazil's fiscal policies, the panelists talked about the need for more transparency. Briozzo said a new administration can take the opportunity to "plant the seed" and create a clear strategy for growth in the next years and long term. "Brazil always had primary surplus, but now it needs it because the debt is too high," said Briozzo. He highlighted possibilities for the government to make more structural changes that could "really move the country to another standard in terms of fiscal policy."

All panelists agreed that a new Brazilian government will have to face adjustments. Thinking in the long term, the experts talked about China as a number one concern for the Brazilian economy, the importance of foreign direct investment, state companies' performances, and how fiscal policies would welcome structural reforms.

 

Watch the panel: