Two years ago, Brazilian President Dilma Rousseff spurned the World Economic Forum to attend an anti-capitalist conference and visit Cuba. This week, she’ll be front and center when the global financial elite gather at Davos in the Swiss Alps.
Rousseff’s about-face is motivated by the need to rebuild confidence shaken by deteriorating public finances and slowing growth, said Gustavo Loyola, a two-time president of Brazil’s central bank. With public debt rising, the currency falling, the trade balance worsening and critics questioning the credibility of government accounts, Rousseff must reassure the global business community, he said.
“She wants to take advantage of Davos to communicate with investors and calm them down,” Loyola, currently a partner at consulting firm Tendencias Consultoria Integrada, said by phone from Sao Paulo. “She is going to try to sell Brazil at a time when investors are skeptical and disappointed.”
Rousseff will be accompanied by Finance Minister Guido Mantega, central bank President Alexandre Tombini and development bank BNDES President Luciano Coutinho, along with other officials. She will address executives and other participants in a special session led by World Economic Forum founder and Executive Chairman Klaus Schwab on Jan. 24.
It may prove to be a tough crowd. In a November Bloomberg Global Poll, 43 percent of investors described Brazil’s economy as deteriorating, while 51 percent were pessimistic about the impact of her policies.
The immediate source of disappointment is faltering growth. Economists estimate Brazil’s gross domestic product expanded 2.3 percent in 2013. That would put the average growth rate during Rousseff’s three years in office at 2 percent, less than half the 4.5 percent average over the prior five years. Even as growth sputtered, inflation in 2013 accelerated to 5.91 percent from 5.84 percent the prior year, the fourth straight year it has exceeded the official 4.5 percent target.
Stubborn inflation led the central bank to embark last April on the world’s biggest rate-increasing cycle, boosting the benchmark Selic to 10.5 percent from a record-low 7.25 percent. Tombini’s task is complicated by a currency that has weakened 26 percent against the dollar over the past two years, driving up prices of imports. Economists forecast the real will drop to 2.45 per dollar from 2.36 at year-end 2013.
Former Finance Minister Rubens Ricupero predicts the currency will fall further, to 2.7 per dollar.
“It’s not a good moment,” Ricupero, who is president of the Fernand Braudel Institute of World Economics, said by phone from Sao Paulo. “Brazil is more in the company of countries like India, Turkey and South Africa, which are vulnerable. Most people go to Davos when their country is doing well.”
A falling real also makes Brazilian assets less attractive to investors. The benchmark Ibovespa stock index has declined 30 percent since Rousseff took office, including 15.5 percent last year. The government’s real-denominated notes lost 13.6 percent in dollars last year, the most since 2002 and more than the 8.5 percent average drop in emerging markets, according to JPMorgan Chase & Co.
Brazil is spending about 8 billion reais ($3.4 billion) on 12 stadiums for the soccer World Cup that kicks off in June, and about 18 billion reais on related infrastructure. Much of the work has been beset by cost overruns and delays, and about one million protesters took to the streets last year, some arguing the money would be better spent on improving public schools and hospitals. Rio de Janeiro will host the 2016 Summer Olympics, the budget for which will be released at the end of this month.
Bill Gross, co-founder and chief investment officer at Pacific Investment Management Co., said Jan. 15 that Brazil is no longer a preferred emerging market after Pimco funds were hurt by bullish bets on the nation in 2013. The world’s largest fixed-income manager said he still finds Mexican debt attractive.
Net foreign direct investment in Brazil was $57.5 billion in the first 11 months of 2013, down from $59.9 billion in the same period the prior year, and $60 billion in 2011. Brazil was the third largest recipient of foreign direct investment among Group of 20 countries in 2012, behind China and the U.S., according to the United Nations Conference on Trade & Development.
As dismal as the economic numbers have been, equally damaging is a loss of confidence in the government, said Edwin Gutierrez, a fund manager at Aberdeen Asset Management Plc, who manages $10 billion of emerging-market debt.
Last year, as tax cuts for businesses and consumers shrank government revenues, Finance Minister Mantega lowered the primary budget surplus target, the amount set aside after interest payments in order to reduce total debt, to 2.3 percent from about 3.1 percent of GDP.
Mantega on Jan. 3 announced that the central government had achieved its primary surplus goal thanks to extraordinary revenue from the sale of the Libra oil field. He didn’t give the result for states and cities, meaning the total target may not have been reached.
Accounting maneuvers to improve the appearance of fiscal accounts have hurt the government’s credibility, especially Mantega’s, said Gutierrez.
“One of the best signals that Rousseff could send would be firing Mantega,” Gutierrez said in a phone interview from London. “He’s got negative credibility. He’s absolutely horrendous for investor sentiment, both local and foreign. We do think she’ll do it in her second term.”
Brazil will hold presidential elections in October. A Datafolha poll taken Nov. 28-29 had Rousseff winning 22 percent of those surveyed compared with 4 percent for her closest rival, opposition Senator Aecio Neves.
The Finance Ministry and presidential press offices declined to comment when contacted by telephone about Rousseff’s motives for attending Davos.
Rousseff stayed in Brazil rather than attend the World Economic Forum in 2011. The following year she attended the World Social Forum, an anti-capitalist meeting created in 2001 as an alternative to Davos, and afterward traveled to Havana to meet with Cuba’s President Raul Castro.
Rousseff is scheduled to arrive in Davos, Switzerland, on Jan. 23, Brazil’s first head of state since 2007 to attend the WEF, which draws global policy makers and executives. Her predecessor, Luiz Inacio Lula da Silva, attended Davos three times during his two terms in office from 2003-2010.
In public appearances, Rousseff frequently cites Brazil’s strong labor market, with unemployment near record lows all last year, and her successes in ending poverty.
Brazil’s current growth rate is not far below its long-term trend, said Thomas Trebat, director of Columbia University’s Global Center in Rio de Janeiro and former Citigroup Inc. analyst. Over the past two decades, GDP growth has averaged 3.35 percent, according to the national statistics agency and economist estimates for 2013.
“Not much has changed in Brazil, not enough to justify all this negativism,” Trebat said by telephone. “A lot of these people are going to be eating their words a year from now.”
In a year-end televised address to Brazilians, Rousseff said critics of her policies were damaging the economy. “If some sectors, for whatever the reason, instill distrust, especially unjustified distrust, that is very bad,” Rousseff said. “Psychological warfare can inhibit investments and slow initiatives.”
At Davos, Rousseff would do well to strike a different tone, according to Paulo Sotero, director of the Brazil Institute at the Woodrow Wilson International Center for Scholars in Washington. Davos is an opportunity for Rousseff to engage with her skeptics, and her attendance should be seen as positive, he added.
“Dilma’s success at Davos in terms of bringing an effective message to foreign investors will be determined by her willingness to dialog instead of lecture,” Sotero said by phone. “Investors have their own ways to measure the success of the Brazilian economy, and they have alternative places to put their money.”
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