Brazil should return to the policies of former President Luiz Inacio Lula da Silva to boost growth, tame rising consumer prices and attract foreign investment, according to Pacific Investment Management Co.
The country’s leaders have tried to fuel growth by ramping up public spending and increasing state-subsidized lending, Michael Gomez, co-head of emerging markets portfolio management at Pimco, wrote in a statement posted on the money manager’s website today. Such efforts have eroded investor confidence in the government, helping to drive up interest rates, he wrote.
Instead the government should set strict targets for its primary surplus, Gomez wrote. A primary surplus is what’s left over after government spending is subtracted from tax revenue, excluding the impact of interest payments on outstanding debt. While such targets might slow the economy, the central bank would probably have room to cut rates from “the anomalously high real and nominal rates it is forced to set today,” he wrote.
Asset valuations in the country are “attractive, but unless an effective policy mix is restored, the outlook for order in Brazil’s financial markets is less certain,” Gomez wrote.
Bill Gross, who manages Newport Beach, California-based Pimco’s $237 billion Total Return Fund, said last week that Brazil was no longer a preferred market for the asset management firm.
Brazilian local-currency bonds plunged 13.6 percent last year, more than the 9 percent average decline for developing nations globally, while government dollar bonds lost 11.2 percent, the most since 1998, according to JPMorgan Chase & Co. index data.
Policy makers last week lifted Brazil’s benchmark lending rate to 10.5 percent, marking the sixth straight half-percentage point increase as the central bank seeks to contain inflation that’s forecast to accelerate to 6 percent in 2014. Latin America’s largest economy is forecast to expand 2 percent this year, down from an estimated 2.3 percent in 2013.
President Dilma Rousseff is in Davos, Switzerland, this week, site of the World Economic Forum, along with Finance Minister Guido Mantega, central bank President Alexandre Tombini and development bank BNDES President Luciano Coutinho to address executives and other participants in a special session.
Gomez didn’t mention Rousseff in his statement.