Brazil’s President Dilma Rousseff is in a better position than when she started her second term in January. The economy isn’t.
Rousseff in late May gained support from reluctant legislators to approve fiscal-austerity measures and cut a record amount of spending as protests calling for her impeachment died down. The largest budget surplus in almost five years in April helped allay concerns that Brazil will lose its investment grade.
Yet currency and equity markets fell last month as investors increased their focus on Brazil’s bleak growth prospects. Plummeting investment and consumer demand in Friday’s first-quarter economic report showed it won’t be easy to rebound from what is expected to be the worst contraction in 25 years.
“The issue becomes whether the government will manage to produce growth in coming years,” Roberto Padovani, chief economist at brokerage Votorantim Ctvm, said by telephone. “It already showed a responsible macroeconomic policy” at the start of Rousseff’s second term, he said.
The real depreciated 5.2 percent against the U.S. dollar last month, the most among emerging-market currencies after the Colombian peso. The benchmark Ibovespa stock index was among the 10-worst performers of 93 major exchanges tracked by Bloomberg as pessimism about Brazil’s economy surged.
The real appreciated 1.3 percent to 3.1284 per U.S. dollar at 1:53 p.m. Sao Paulo time on news that state-controlled Petroleo Brasileiro SA successfully returned to overseas capital markets with a $2.5 billion sale of 100-year notes.
Rousseff now will focus on getting growth back on track after implementing fiscal-austerity measures in the first five months of her second term, Social Communication Minister Edinho Silva said Monday.
“The measures approved last week by Congress create the conditions for the government to implement a positive agenda, its development agenda of resuming economic growth,” Silva told reporters in Brasilia.
First on the list is a multi-billion dollar program to entice investors to modernize and expand roads and railways. The government will unveil the plan to free up bottlenecks and increase productivity on June 9, according to Rousseff.
The government seeks to make contracts more attractive by easing investment requirements and lifting caps on profits, according to an official on Rousseff’s economic team, who asked not to be named because the information isn’t public.
Plans to announce the third phase of a low-cost housing program as well as credit for farmers are designed more to improve confidence than to kick-start growth, the official said. The government is working behind the scenes on an extensive agenda to reduce the role of the state in the economy and create investment opportunities for businesses, he said.
Jorge Mariscal, chief-investment officer for emerging markets at UBS Wealth Management, is skeptical Rousseff will be able to boost growth significantly anytime soon. In addition to reducing government intervention, she needs to cut labor costs and simplify taxes, Mariscal said.
“Rousseff’s government is not particularly aggressive on the reform front, and not much has changed,” he said by phone. “It is not going to be meaningful growth. It’s mediocre at best.”
The economy shrank 0.2 percent in the first quarter from the last three months of 2014. While that was better than economists had forecast, the report prompted Banco Bradesco SA to forecast an even deeper recession in 2015 because of the drop in services and the “notable” slip in family purchases.
The Brazilian bank sees a contraction of 1.7 percent this year, which would be the worst performance since 1990.
Finance Minister Joaquim Levy said in Washington Monday that his belt-tightening measures are structural reforms that will help build a new economy “brick by brick,” adding that the recovery will be slow.
Meanwhile rising unemployment and the surging cost of living have eroded demand for items from cars to groceries. Latin America’s biggest economy will contract 0.8 percent in the second quarter, according to the median forecast of analysts surveyed by Bloomberg. In April, Brazil lost jobs for the first time on record for that month.
The economic woes threaten to erase the political gains Rousseff made in May. While anti-government protests that drew more than 2 million people to the streets in March have subsided, her popularity continues to hover at record lows.
“Dilma is under less pressure today, but the economy is sinking” Andre Cesar, an independent political analyst in Brasilia who previously worked at CAC Consultoria, said. “She only has a few months of respite to deal with the situation.”