Rousseff Vows Brazil Economic Adjustment With Minimum Pain

President Dilma Rousseff said she will tighten Brazil’s budget, increase investment and productivity in an effort to restart economic growth, while minimizing “sacrifices” by the population.

“We will prove that economic adjustments are possible without revoking acquired rights or betraying our social obligations,” Rousseff said yesterday during the swearing-in ceremony for her second term. “More than anyone I know Brazil needs to resume growth.”

Since Rousseff, 67, took over from her mentor Luiz Inacio Lula da Silva four years ago, the budget deficit has more than doubled to 5.8 percent of gross domestic product and economic growth has come to a standstill from 7.5 percent growth in 2010. Inflation has remained above the center of the target range throughout her first term.

Rousseff, who won an Oct. 26 runoff election by the narrowest margin of any president since at least 1945, has appointed a new economic team and announced spending cuts. The central bank increased the key lending rate twice since the election to contain consumer price increases.

While such measures are a first step to prevent a credit rating downgrade, the question is whether Rousseff will have the political support to hold the course, said Rafael Cortez, political analyst at Tendencias, a Sao Paulo-based consulting firm.

‘Economic Malaise’

“The economic malaise will spread to consumers and the corruption scandal will impose a negative legislative agenda,” Cortez said in a phone interview before her speech. “In a best-case scenario, she’ll manage to recover some investor credibility and pave the wave for moderate growth; the worst case is that we’ll have a lame duck president in a year or two.”

Finance Minister Joaquim Levy, who along with other cabinet members was also sworn in, pledges to pursue a budget surplus before interest payments of 1.2 percent of gross domestic product this year and at least 2 percent of GDP in 2016 and 2017, after Brazil’s credit rating in 2014 suffered a downgrade for the first time in more than a decade. The primary budget balance turned to a deficit of 0.18 percent of GDP in the 12 months through November, the first such annual shortfall on record.

The real depreciated 1.4 percent at 1:25 p.m. today to 2.6956 per U.S. dollar. The central bank said Dec. 30 after markets closed it would cut in half its currency intervention.

Social Welfare

On Dec. 29 the government announced cuts to pension and unemployment benefits that will save an estimated 18 billion reais ($6.7 billion). Authorities also have increased the long-term lending rate for loans granted by the state development bank BNDES to 5.5 percent from 5 percent.

Social welfare spending, which helped assure her support among the lower income voters, particularly in the poorer northeast, would not suffer cuts, Rousseff said. The government will build an additional 3 million low-cost houses, expand community health care, and provide additional vocational training, she said.

Slower growth and a widening budget deficit prompted Moody’s Investors Service in September to cut Brazil’s credit outlook to negative. Moody’s rates Brazil Baa2, two levels above junk. Its move came six months after Standard & Poor’s reduced Brazil’s rating for the first time in more than a decade to the lowest level of investment grade.

Annual Inflation

With annual inflation having exceeded the 6.5 percent ceiling of the target range in the four months through November, more than two-thirds of Brazilians disapprove of Rousseff’s policies to contain consumer prices, a December opinion survey by Ibope polling firm showed. It interviewed 2,002 people and had a margin of error of plus or minus two percentage points.

Rousseff said yesterday that inflation would remain within the target range. As part of an effort to improve the business climate and improve the country’s productivity, she pledged to slash red tape, improve regulations to boost the long-term debt market, and expand to more small companies existing tax breaks and simplified returns. Her government will also present a new plan for public and private investments in logistics, energy and urban infrastructure.

A scandal over alleged kickbacks on contracts with state-owned oil company Petroleo Brasileiro SA also threatens to erode Rousseff’s support and create legislative gridlock, Cortez said. Prosecutor General Rodrigo Janot said Dec. 17 that he will request in February an investigation of almost 30 members of Congress, newspaper O Globo reported.

’External Enemies’

Rousseff said yesterday she counted on Congress to implement the necessary measures to kick-start the economy and make Brazilian politics more transparent.

The government will work to implement stricter governance in the oil company, Rousseff said without giving details. “We have many reasons to preserve and defend Petrobras from internal predators and its external enemies.”

Rousseff was chairman of the company’s board from 2003 to 2010, and ex-Petrobras executive Pedro Barusco testified that the corruption network existed before and throughout her tenure. Rousseff said Sept. 8 that while she was chairman she was unaware of corruption at Petrobras. The chairman is not involved in the day-to-day running of the company.

More than two in three Brazilians polled by Datafolha say Rousseff has some responsibility for the corruption scandal at Petrobras, according to the survey of 2,896 people on Dec. 2 and 3, which had a margin of error of plus or minus two percentage points.

U.S. Visit

“Brazil knows I never condoned any illegality or wrongdoing,” Rousseff told legislators and foreign guests in Congress, including Chile’s President Michelle Bachelet and Bolivian President Evo Morales.

She met with U.S. Vice President Joe Biden in Brasilia after the swearing-in ceremony. Rousseff will visit the U.S. this year, according to Chief of Staff Aloizio Mercadante. She called off a state visit to Washington in September 2013 as allegations of U.S. espionage damaged relations between the two biggest economies in the Americas.

The presidential press office didn’t respond to an e-mailed request for comment on the Datafolha poll and the impact of the scandal on her support in Congress.

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