Rousseff Vows `Sustainable' Reduction in Brazil's Rates By Lowering Debt

Brazilian President-elect Dilma Rousseff said she will reduce her country’s debt levels so that interest rates, which are the second-highest in the world after inflation, can fall in a “sustainable” way.

Rousseff, in a television interview yesterday, said her goal is to reduce net debt to 38 percent of gross domestic product, from 42 percent today. She didn’t provide a timeframe.

“At this level there is no technical reason for Brazil’s interest rates not to converge to international levels,” Rousseff said in an interview with SBT television, one of at least four TV appearances since she was elected Oct. 31.

Rousseff yesterday named former Finance Minister Antonio Palocci to lead her transition team along with Vice President- elect Michel Temer, Workers’ Party chief Jose Eduardo Dutra and Congressman Jose Cardozo. Palocci’s reduction of Brazil’s debt and budget deficit during Lula’s first term won the support of international investors including Pacific Investment Management Co., manager of the world’s biggest bond fund.

Now a congressman from Sao Paulo state, he served as Rousseff’s main economic adviser during her campaign. Under Palocci’s watch, from 2003 to 2006, Brazil’s inflation rate slowed to 5.3 percent from 17.2 percent and the Bovespa stock index more than doubled.

Interest Rate Bets

Before she named her transition team, traders were betting Rousseff wouldn’t be able to cut the fiscal deficit enough to allow the central bank to lower the benchmark rate, which was left unchanged last month at 10.75 percent.

The interest-rate futures contract due in January 2015, the month Rousseff’s first term would end, yielded 11.55 percent on Nov. 1, a level that suggests traders expect policy makers will raise the benchmark rate about 0.75 percentage point during the next four years, data compiled by Bloomberg show. Markets were closed yesterday in Brazil for a public holiday.

Rousseff, a former Marxist guerrilla who had never run for public office before, became the first woman ever elected to Brazil’s presidency with 56 percent of the vote compared with 44 percent for Jose Serra, the former governor of Sao Paulo state.

The 62-year-old said she hasn’t decided who she will invite to join her Cabinet that takes over from President Luiz Inacio Lula da Silva’s government on Jan. 1. Cabinet appointments will be based on technical capacity and leadership skills and will be announced in blocks, she said.

Debt Reduction

During the campaign, Rousseff said she wanted to reduce net debt to about 30 percent of GDP by 2014 so that Brazil’s real interest rate of about 6 percent, the second-highest in the world after Croatia, could fall. Any reduction of borrowing costs must not come at the expense of inflation, she said.

“Rates will only fall if we keep the public debt on a downward trend,” she said in a separate interview with Band TV.

The president-elect told Band she will continue the government’s policy of annually increasing the country’s minimum wage based on a formula that combines the previous year’s inflation, as measured by the INPC index, with the percentage growth of GDP from two years prior.

Since Latin America’s biggest economy stalled during the global financial crisis last year, the wage increase for 2011 will be a little above inflation, she said. Lula raised the minimum wage 9.7 percent this year, to 510 reais ($299), and proposed an increase of 5.5 percent in 2011 to 538 reais.

‘Tough Measures’

While Lula will lead negotiations with Congress over the minimum wage increase and 2011 budget before leaving office, Rousseff said she doesn’t expect the outgoing government to enact special legislation to ease her transition to power.

“I only want what is necessary,” Rousseff told SBT. “I don’t think the president will take tough measures.”

Rousseff told Band she plans to create a regulatory framework for media that would allow Brazil to integrate new technologies and ensure fair competition, as well as provide rules for foreign ownership of local companies.

She also reiterated campaign pledges to reduce payroll taxes and levies on investment, as well as work with state governments to reduce taxes on prescription drugs, sanitation and electricity.

Rousseff told Band she would not comment on speculation she would seek re-election in 2014 or stand down to allow Lula to try and return to power.

“It’s usual” for presidents in Brazil to seek re- election, she told Band. “But to talk about this now without even being sworn in is inconceivable.”

On foreign affairs, Rousseff said she would continue the Lula government’s “south-south” diplomacy focused on extending ties with the developing world. She said she had the “best of impressions” of U.S. President Barack Obama and hoped bilateral relations between the two countries will be “very close.”

The two will meet when Rousseff travels to South Korea next week with Lula to attend a summit of leaders from the Group of 20 nations.

To contact the reporters responsible for this story: Katia Cortes in Brasilia at kcortes@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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