The Brazilian government’s mix of economic-stimulus programs are inflationary and probably can’t last, according to former central bank President Arminio Fraga.
“The policy mix now in place may not be sustainable,” said Fraga, the founder of hedge fund and private-equity firm Gavea Investimentos Ltda., which was bought by JPMorgan Chase & Co.’s Highbridge Capital Management unit in 2010.
Since the 2008 financial crisis, President Dilma Rousseff’s administration has tried to boost demand by “pumping credit,” with state-owned banks playing “a very important role,” Fraga said in an interview in Rio de Janeiro, adding that the central bank aggressively lowered interest rates even without low or stable inflation. “That came back with a vengeance,” said Fraga, who is advising Aecio Neves, the likely opposition candidate facing Rousseff in the Oct. 5 presidential election.
Inflation as measured by the benchmark IPCA index accelerated to 0.69 percent in February from 0.55 percent in January, according to the national statistics agency. That was faster than forecast by 49 analysts surveyed by Bloomberg. Annual inflation quickened to 5.68 percent from 5.59 percent.
“With no supply-side response, the demand ended up leaking into inflation and also took the current account from surplus to deficit,” Fraga said.
Standard & Poor’s in June placed Brazil’s rating on negative outlook, and Moody’s Investors Service in October lowered its outlook to stable from positive, citing deteriorating fiscal policy.
Rousseff has been “stretching the limits of budget accounting” to avoid showing a bigger deficit, and trying to keep a lid on inflation by regulating prices on consumer goods such as gasoline and bus fares, Fraga said.
“Although the current picture may not be so bad, markets look at the deteriorating trend,” said Fraga. “People aren’t happy, business people are coming out saying they’re frustrated, and there is no politician in Brazil that will do well if inflation isn’t under control,” Fraga said.
The government is responding by raising interest rates, he said.
“At some point there will be issues” if interest rates rise in the U.S., the Brazilian central bank maintains inflation at the upper limit of its target range and Rousseff’s government keeps using state-owned banks to stimulate credit and demand, said Fraga, who was president of Brazil’s central bank from 1999 to 2002.