Brazil Economy Chief Not Worried About Austerity Backlash

  • Temer chooses banking veteran as his finance minister
  • Meirelles doesn’t rule out tax hikes, sees tough measures

Brazil’s new economy chief Henrique Meirelles lost little time to make clear he plans to move aggressively to slash spending and debt levels to boost investors confidence, regardless of any popular backlash.

In his first press conference since being appointed finance minister by Acting President Michel Temer, Meirelles said Brazilian society was mature enough to understand the need for belt-tightening measures and that he wasn’t worried about protests.

"Those who will feel harmed certainly will protest," said Meirelles. "Protests are part of democracy, we’re not at all worried about that."

Meirelles, who slashed inflation when he was central bank chief for most of the last decade, not only brings the technical skills but is also more astute in politics than some of his recent predecessors

Having had a foot in several political parties, the former president of BankBoston Corp. is seen as someone who can build consensus in Congress for the kinds of spending cuts that analysts say are needed to tame the deficit, slow inflation and lure back investors.

"In many ways he is what Brazil needs," said Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Asset Management in London. "He is a politician, he knows how to work in Brasilia."

While lacking charisma, Meirelles, 70, is admired by many in Brasilia and is an ambitious leader who could position himself for a run at the presidency in 2018 if his term as finance minister proves successful, especially in the current chaotic climate. Since leaving the central bank, he became a senior adviser at Kohlberg Kravis Roberts & Co. Ltd and the chairman at J&F Investimentos SA, the holding company that controls the world’s largest meat producer, JBS SA.

Lost Investment Grade

For the better part of the past year, a rolling corruption scandal and the political turmoil accompanying Rousseff’s impeachment have all but sidelined measures in Congress to curb a budget deficit that tripled in the past two years, costing Brazil its coveted investment grade credit rating and helping deepen a brutal recession.

Meirelles, Brazil’s longest serving central bank president, kept inflation within the government’s official target range in all but his first two years in office. That allowed him to cut the country’s benchmark interest by more than half during his tenure -- the entire duration of President Luiz Inacio Lula da Silva’s term.

Investors who saw inflation overshoot the government’s 6.5 percent ceiling by more than 4 percentage points last year are now looking to Meirelles to repeat the feat by reining in spending and boosting productivity in the world’s ninth-largest economy.

Although Meirelles had a famously collegial relationship with Lula, who left him alone to run monetary policy, Rousseff resented the banker’s insistence on independence. Less than a month after her first election in 2010, Rousseff, who was Lula’s handpicked successor, ruled out having Meirelles stay at the central bank.

Four years later, at the beginning of her second term, Lula urged her to bring Meirelles back to government as finance minister to stem a deteriorating economy. Again she demurred and chose Joaquim Levy, a University of Chicago-trained economist. He was hailed by markets as the ideal choice but he was gone in less than a year after failing to win support in the opposition or in Rousseff’s own party for the austerity measures he was pursuing.

Ilan Goldfajn

Now, in a sign of the extensive powers Meirelles will have, Temer gave the trained engineer and business administrator a free hand in choosing a central bank chief. Ilan Goldfajn, currently chief economist at Itau Unibanco Holding SA, Brazil’s biggest bank by market value, is Meirelles’s top choice for that job, according to two Temer aides. Goldfajn, who served as a central bank board member between 2000 and 2003, didn’t immediately reply to an e-mail seeking comment.

Meirelles said he will appoint the remainder of his team and the new central bank directors on Monday. Traditionally, the top monetary authority in Brazil is announced by the president.

Meirelles will need to act quickly and decisively, said Eduardo Castro, chief investment officer at Santander Brasil Asset Management in Sao Paulo, whose 6.2 billion-real ($1.8 billion) fund FI Renda Fixa Santander Oviedo fund is the country’s top performer among those with more than $500 million under management. The budget deficit has swelled to the equivalent of 9.7 percent of gross domestic product from less than 3 percent in early 2014.

"We can’t forget how much trouble the Brazilian economy is in," Castro said. "From a fiscal perspective, you need a significant scaling back of public accounts just to stabilize the debt trajectory. But more than a quick change, we need a signal of where we are going."