A Talk With Brazil's Finance Minister
For the first time in decades, Brazil is enjoying both solid economic growth and price stability. Its gross domestic product, Latin America's biggest by far at $650 billion, is expected to grow by 4% this year, repeating last year's rise. Inflation, which soared more than 40% per month in early 1994, has fallen below 20% annually.
Foreign investors are jumping aboard for the ride. In the first 40 days of 1996, $4.5 billion of portfolio investment entered the country. As insurance against a destabilizing flood of volatile capital, the government of President Fernando Henrique Cardoso on Feb. 9 slapped a 5% tax on some types of investments and raised to three years the minimum maturity of some.
A key member of the Cardoso team shaping such policies is Finance Minister Pedro Malan, 53, a University of California PhD. On Feb. 12, in his Brasilia office, Malan discussed Brazil's economic prospects with Ian Katz, BUSINESS WEEK's correspondent based in Sao Paulo.
Q: How will you manage the influx of "hot money"?
A: Our [new requirement] of a minimum three-year permanence has been taken naturally by the markets. That is a good sign that we are receiving capital inflows with longer maturities. If you want to have an open economy, you have to ensure the conditions for capital to flow out as well as in. When the credibility and confidence are there, what may seem to be shorter-term capital may stay longer. This is the bet we are making.
Q: How will you finance Brazil's worrisome domestic public debt--totaling $170 billion at the federal, state, and municipal levels?
A: It's around 30% of GDP, not high by any international comparison. The primary interest rate, relevant for the cost of servicing domestic debt, reached a peak last March of 4.26% a month, which was very high. It's now 2.3%. The situation in 1996 will be far better than in 1995 on that score.
Q: Why has Brazil amassed $50 billion of international reserves?
A: Let's say it's a comfortable level. There is a cost for building up reserves, but we wanted to make clear that [a crisis such as Mexico's peso collapse] was not going to happen in Brazil. We would not allow the current account deficit to reach 8% of GDP as it did in Mexico in 1994. We don't envision the need to continue the reserve buildup from now on.
Q: Foreign direct investments in Brazil will total $5 billion this year, by some estimates. What sectors are attracting that money, besides autos?
A: All indications we have from the chairmen of international corporations from Europe, the U.S., and Japan are that there will be an increase over last year's $3.3 billion. It's going to a very wide spectrum [of investment]. Brazil is not a Johnny-come-lately to this issue. We have close to $60 billion of foreign direct investment already.
Q: What are the prospects for privatizations this year?
A: As you know, we have privatized the whole steel sector and a large bulk of petrochemicals. For telecommunications, clear-cut rules of the game for concessions and pricing will be sent to Congress shortly. In the electrical sector, it's a learning experience in privatizing specific parts. In privatizing [Rio de Janeiro utility] Light, we are drawing on the experience gained in privatizing Escelsa, in Espirito Santo state.
Q: Brazilian banks are consolidating. Will foreign banks be allowed to play a larger role in Brazil?
A: We are open to this on a case-by-case basis, if we consider it to be in the interests of the country. It requires a presidential decree. A large Dutch bank, Rabobank, was allowed to open full-fledged banking activities. It was in our interest to have their worldwide expertise in financing agribusiness. We have allowed Hongkong & Shanghai Banking Corp. to buy shares of [fourth-largest commercial bank] Bamerindus.
Q: Are other business sectors consolidating?
A: The auto-parts industry had a lot of small companies. It is undergoing a huge restructuring with economies of scale.
Q: What is Brazil doing to boost savings?
A: In the public sector, you have to reduce the extent of dissaving. That is why we are so concerned with fiscal adjustment. Private domestic saving is increasing. Social security reform will help. We are giving tax incentives for private savings in complementary pension funds. The private sector is exploring these. Our savings rate is 20% of GDP. We ought to regain at least the 25% rate of the late 1960s and 1970s, when GDP was growing 6% to 7% per year.