Brazilian President Dilma Rousseff is charting a new course to revive a flagging economy: more listening to investors and fewer unilateral decisions.
Since Jan. 1, Rousseff has met one-on-one with 11 businessmen, from billionaire Eike Batista to Banco Santander SA Chairman Emilio Botin, to reverse a slide in sentiment that’s behind the world’s third-worst stock slump. This week she sent to New York and London aides including Finance Minister Guido Mantega to shop for $235 billion in infrastructure investments.
The outreach comes ahead of a report tomorrow that is forecast to show the economy expanded 1 percent last year, half the pace of the U.S., even as inflation headed above 6 percent. While the rest of South America benefits from optimism that Europe’s debt crisis is being contained and China’s growth rebound, investors in Brazil are wondering what comes next after a barrage of measures since Rousseff took power in 2011, from abrupt turns in currency and monetary policy to cuts in taxes and utility rates.
“Authorities realize they have a confidence problem and that’s why they’re trying a charm offensive,” Luis Oganes, head of Latin America research at JPMorgan Chase & Co., said in a phone interview from New York. “There’s a realization that hyperactive policymaking last year damaged the government’s image. What we hear from officials is that they want to tone this down and provide clearer signals” to investors.
After a decade in power spreading to the poor the wealth generated by Brazil’s commodities boom, Rousseff’s Workers’ Party, or PT, is now trying to tackle longstanding obstacles to faster growth that are known as the “Custo Brasil,” or Brazil cost. Brazil’s aging infrastructure is ranked below that of many African nations by the World Bank and the country’s tax burden as a percent of gross domestic product is nearly double the region’s 20 percent average, Oganes says.
One reason for the PT’s difficulty in luring investment is a mistrust of private enterprise. Rousseff, a former guerrilla who was jailed by Brazil’s military dictatorship in the 1970s, vowed in a televised speech marking Sept. 7 Independence Day “not to rest” until banks and power companies lower to “civilized” levels their fees and rates.
Economists have long advocated cost-cutting to boost competitiveness in the world’s No. 2 emerging market. Still, imposing such policies by fiat without taking into account galloping inflation is creating distortions, said Armando Castelar from the Getulio Vargas Foundation, a university. Among those caught in the crossfire is state-run Petroleo Brasileiro SA, which reported its first quarterly loss in 13 years in 2012 as the government kept a lid on gasoline prices.
“There’s a common philosophy that investors were earning too much and profits needed to be reduced at any cost and as quickly as possible,” Castelar, who heads FGV’s applied economics research institute, said in an interview in Rio de Janeiro. “This scares away investment, both by those being attacked today and those who wonder if it’ll be them tomorrow.”
The “original sin,” which made the business climate less predictable, was aggressive cutting of interest rates with inflation above the 4.5 percent target since 2010, said Castelar. The use of capital controls to weaken the currency and aid manufacturers has also fueled volatility, he said. The real plunged 24 percent in the 12 months that followed its reaching a 12-year high in July 2011, more than all major currencies.
Another blow to confidence came last September when Rousseff announced the government would renew electricity concessions only for companies agreeing to slash rates by more than 20 percent. Brazil’s 16 biggest power utilities, including Batista’s MPX Energia SA, lost $19 billion in market value between the announcement and the end of the year.
The rate cut, which Itau Unibanco Holdings SA, Brazil’s biggest bank by market value, said left industry executives “stupefied,” dragged down broader sentiment. The Bovespa index has fallen 6 percent this year, the third-worst performance among 94 benchmark gauges after Jamaica and Slovakia.
Mantega, in an interview, defended the government’s record, saying that the capital controls were essential for stabilizing the exchange rate at a level that permits industry to survive. Implied volatility on one-month real options, which reflects investors’ expectations for future currency swings, has fallen to 9 percent yesterday from 15 percent at the end of June, according to data compiled by Bloomberg.
With regards to the power cuts, Mantega said investors weren’t paying attention to policy shifts that were signaled well in advance.
“What happened is that some companies, some investors, didn’t get their math right,” he said at Bloomberg’s New York headquarters Feb. 26. “During a crisis you have to make changes, clear and transparent ones that respect the rules of the game, to create conditions for growth to resume.”
With low interest rates discouraging investment in bonds, which have traditionally provided easy returns in Brazil, stocks this year should rally, he said.
The same state-led approach is being used to modernize roads, ports, railways and airports, with public banks taking the lead. Private bank lending slowed for a second straight year in 2012, expanding 8 percent, while loans by state-owned banks such as development lender BNDES surged 27 percent.
More recently the government has emphasized unleashing what Mantega has taken to calling investors’ “animal spirits,” a phrase coined by the late British economist John Maynard Keynes. After companies balked at participating in a Jan. 30 auction of stretches of two major highways, the sale was pulled and the contract terms sweetened by extending concession periods by five years and raising minimum guaranteed returns.
Tougher on Inflation
“It was a stroke of luck that the private sector didn’t show up,” said Claudio Frischtak, president of Inter.B, a Rio-based consultancy specializing in infrastructure. “The government woke up to the fact that it needs to do its homework to attract investment”
Another sign of a turnaround may be comments this month by both Mantega and central bank President Alexandre Tombini that policy makers stand ready to raise borrowing costs after vowing for months to keep the key rate at a record low 7.25 percent for an extended period.
The shift on inflation as Rousseff gears up for a likely re-election run next year led JPMorgan on Feb. 20 to push forward to May from 2014 its forecast for rates to begin rising. Policy makers lowered the Selic in August 2011 after raising it at each of its five previous meetings, fueling speculation that the surprise cut was coordinated with the government.
Mantega’s first trip to Wall Street since September 2011 and Rousseff’s opening her agenda to investors are steps in the policy rebranding, according to three government officials. Slower-than-expected growth and the electricity industry selloff led to the shift in strategy, according to the officials, who asked not to be named because they are not authorized to describe the internal discussions.
One businessman, also speaking on condition of anonymity because his conversation was private, said he left a two-hour meeting in Rousseff’s office reassured that the president is fully aware of past mistakes and is intent on using all policy levers to speed up private investment.
The president’s office declined to comment in an e-mail.
The government’s determination to push through changes that threaten entrenched interests will be tested in its effort to restructure the nation’s ports. Unloading and moving cargo through customs takes up to seven days in Brazil, triple the time in the U.S., according to the World Bank. Unions at the public ports walked off the job for six hours Feb. 22, stating that Rousseff’s proposal to sell 159 terminals to investors would destroy jobs. The government postponed the first auctions while it negotiates an end to the standoff.
Tomorrow’s GDP report will likely show that investment fell for a sixth straight quarter, Castelar says. Investment equal to 18.7 percent of GDP is the lowest among the region’s major economies and less than half of China’s 48 percent.
Brazil is far from a crisis like the one it survived in 2002, when Rousseff’s mentor and predecessor, Luiz Inacio Lula da Silva, gained power as investors dumped the nation’s debt on concerns the former union leader would default.
Gross debt levels, while on the rise since 2011, are the envy of advanced economies, a heated jobs market is fueling robust demand and foreign direct investment of $65 billion last year surpassed all nations except the U.S., China and Hong Kong.
‘Lot of Cards’
“They still have a lot of cards to play, and if they play them right, they will have a great future,” Christian Deseglise, head of sales for the Americas at HSBC Holdings Plc. and co-director of Columbia University’s BRICLab, said in a phone interview from New York.
As a result of past stimulus, GDP should expand 3 percent this year, Oganes said. Still, that’s below Brazil’s 3.6 percent annual average over the past decade and less than forecasted growth for every major regional economy except Venezuela.
“The key question now is how to undo what you’ve already done without losing credibility,” Beny Parnes, a former central bank director in 2002 and 2003, said in an interview in Rio de Janeiro. “The best thing would be to stop talking and let private investors and the market get to work.”