Brazil Miracle Architect Emerges as Ally of Rousseff’s Rate Cuts

Brazil should refrain from raising interest rates if President Dilma Rousseff hopes to win a “tug of war” with banks and spur faster growth, the architect of the country’s economic miracle in the early 1970s said.

Antonio Delfim Netto was finance chief when Brazil’s dictatorship jailed the then-Marxist activist Rousseff in 1970. Now, as a consultant and columnist he’s an often solitary voice praising her government’s cutting of rates to a record and use of capital controls to weaken the real.

Delfim Netto’s views run contrary to that of economists from Itau Unibanco Holdings SA, the nation’s largest bank, and JPMorgan Chase & Co., who say Rousseff’s policies on rates and the currency have been stoking inflation above the 4.5 percent target since 2010. Rousseff is on the right track and should stay the course, defying rate-swap traders who expect the central bank to raise interest rates 150 basis points by year-end, he said.

“If you raise rates 25 basis points now, the game is over,” Delfim Netto, 84, said in an interview at his office in Sao Paulo. “You’ll have to raise them 25 basis points at the next meeting, then 25 at the one after that. But it’s a deadly trap since inflation is going to slow anyway, and when it does the market will say it was because they were right.”

The central bank board led by President Alexandre Tombini said yesterday any rate action will depend on future indicators, because while inflation of 6.3 percent is the highest in 14 months, the economy has been recovering more slowly than anticipated.

Economic Miracle

As finance minister from 1967 to 1974, Delfim Netto oversaw what became known as the Brazilian economic miracle, when gross domestic product expanded at an average annual clip of 10 percent, still the fastest on record.

Rousseff then was a member of the underground group VAR-Palmares that took up arms against Brazil’s dictatorship and allegedly plotted to kidnap Delfim Netto, the so-called super minister and the most powerful civilian in the government.

While Rousseff has criticized the dictatorship’s human rights abuses, she’s found common cause with some of its economic policies as drafted by Delfim Netto. These include the generals’ championing of big-ticket infrastructure projects and state-run oil company Petroleo Brasileiro SA as well as the promotion of labor-intensive manufacturing over finance.

Rates War

“Delfim always believed that policy will triumph and that’s a view Dilma shares,” said Albert Fishlow, a former U.S. deputy secretary of state who has known Delfim Netto since the 1960s, when he began studying Brazil’s economy. “He never fully believed that markets, prices, financial flows and globalization were dominant characteristics of the way the world was changing.”

Delfim Netto said his admiration for the president stems from what he described as the “tug of war” she started with banks, which for years profited from borrowing in dollars to lend reais to the government at rates that were the highest in the world.

Since taking office in 2011, Rousseff has vowed to lower borrowing costs to “civilized” levels and under her watch policy makers have cut the benchmark rate 525 basis points to a record 7.25 percent, more than any other Group of 20 nation.

“The financial system is always worried when you want them to make an honest living,” said Delfim Netto, who as planning minister at the end of the 1964-1985 dictatorship negotiated with banks a rescheduling of Brazil’s foreign debt. “But what people refuse to understand is that Brazil for years was the only country feeding investors turkey and stuffing when it wasn’t even Thanksgiving.”

Brazil’s banking federation, known as Febraban, declined to comment in an e-mail.

Growth ‘Tragedy’

Lower rates should stimulate the economy after it expanded 0.9 percent last year, a level that Delfim Netto called a “tragedy” though one that helped correct policy mistakes.

Growth can accelerate without stoking inflation because price increases will subside in the second half of the year from a peak of around 6.5 percent as a better harvest takes pressure off food prices and a 14 percent increase in the minimum wage last year is fully absorbed, he said. If such a benign scenario doesn’t materialize, central bank President Tombini won’t hesitate to raise borrowing costs, he said.

“The curtain dropped and a new show is about to begin,” said Delfim Netto, whose policies for state-driven growth gave way to inflation that, after the 1970s energy crisis, exceeded 200 percent.

Currency Intervention

“What’s surprising isn’t that growth this year will be 3 percent to 4 percent but that some people are happy with that,” he said in the March 4 interview. “It shows that there’s an enormous amount of work to be done that’s just beginning.”

Delfim Netto also supports the government’s taxing of capital inflows to weaken the real, which he said needs to stay stable at around 2.10 to 2.15 per U.S. dollar for manufacturers to compete with goods made in China. The real closed at 1.9717 yesterday and has gained 4.05 percent this year.

“Brazil’s problem doesn’t have anything to do with productivity but with the policies supported by a false ideology that the market can regulate itself,” he said. “For years we had an overvalued currency and imagined that it didn’t have any consequences. It had consequences, and very serious ones.”

Delfim Netto is still active as a lobbyist for corporate clients through his Sao Paulo-based consulting firm Ideias, a sought-after lecturer and a weekly columnist for the country’s main business daily, Valor Economico.

Economic Czar

Brazilian weekly magazine IstoE said in a special anniversary edition last October that Delfim Netto is the official who best personifies Brazil’s economic development over the past four decades.

After once supporting the generals’ silencing of dissent and freezing workers’ salaries as economic czar, he’s reinvented himself as an enthusiast of the wealth redistribution policies of Rousseff’s predecessor and mentor, Luiz Inacio Lula da Silva, a former union leader.

Lula frequently spoke with Delfim Netto while in office from 2003 to 2010 and praised him in public. Rousseff’s press office declined to name non-government economists she consults, saying in an e-mail that private activities aren’t disclosed. While Delfim Netto has urged business to back Rousseff, he denies that he’s a confidant.

Lula’s Surgeon

“Do you believe everything in the press?” he joked, pointing to a newspaper cartoon parodying Rembrandt’s “Anatomy Lesson,” with a bearded Lula resembling the corpse and himself as the surgeon Dr. Nicolaes Tulp before an audience of ex-presidents and policy makers. “In my case, the patient lived.”

While Delfim Netto approves of Rousseff’s performance -- he says under her tough managerial approach “Brazil now works from 7 a.m. to 11 p.m.” -- he does have some friendly criticism. For one, he says the government relies excessively on “useless accounting tricks” to mask the growth of spending since the 2008 financial crisis, undermining the credibility of its fiscal numbers. The government is also burdening Petrobras by requiring it have at least a 30 percent stake in pre-salt oil projects, he said.

While Rousseff got off to a bad start by “being a little aggressive” with investors, she’s since moderated her discourse, he said, adding that an upcoming round of road, port and railway upgrades being auctioned should draw heavy interest.

“Perhaps what you can say is that she’s generated anguish by trying to attack all these problems at the same time, but all of her interventions have been in the right direction,” he said. “She needs to fight with everyone because we need to undertake structural and institutional changes for Brazil to grow 5 percent again.”

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