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Brazil’s New Central Banker Sees Huge GDP Drop, Grim Outlook

  • As top Itau economist, he expected GDP to fall more than 3.7%
  • Markets have rallied on hopes new cabinet can revive growth

Brazil’s new central banker Ilan Goldfajn comes to the job with a sober view on Latin America’s largest economy, saying approval for recovery measures will be hard to come by.

As chief economist for Brazil’s largest bank Itau Unibanco Holding SA, Goldfajn expected a deeper economic contraction than the 3.7 percent median forecast by 41 economists in a Bloomberg survey.

Now that he’ll head the central bank, pending confirmation from Congress, he’ll have to use the tools at hand to prove himself wrong on the GDP front, by trying to jump start the economy while keeping consumer prices under control and trimming benchmark interest rates from the highest in almost a decade. The 50 year-old Massachusetts Institute of Technology-trained economist was named Tuesday by Finance Minister Henrique Meirelles, who himself recently took the post as Acting President Michel Temer completes his cabinet appointments.

In reports written over the past weeks for Itau, Goldfajn said approval for the adjustments sought by Meirelles will be difficult, and improved sentiment won’t avert a “marked drop” in the economy.

That may help ease pressure on inflation. As the second-most accurate consumer price forecaster over the past two years, according to Bloomberg data, Goldfajn sees inflation easing to 6.9 percent in 2016, just below the average estimate in the latest central bank survey.

‘Good Choice’

"It’s a really good choice, especially considering Temer’s concern about unemployment, which would point to lower interest rates," said Marco Maciel, an economist at Bloomberg Intelligence, who studied with Goldfajn at university in Rio de Janeiro.

The Israeli-born Goldfajn, who is married with three children, did a stint at the central bank as a board member from 2000 to 2003. At MIT he wrote a doctorate thesis under the supervision of Fed Vice Chairman Stanley Fischer, and also worked in posts at the International Monetary Fund and at Arminio Fraga’s investment firm Gavea Investimentos Ltda.

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Goldfajn inherits a benchmark lending rate of 14.25 percent and inflation running more than double the official target. The outgoing central bank President Alexandre Tombini, who praised Goldfajn’s extensive financial industry experience in a statement Tuesday, lost “the communication battle” during his term, said Amaury Bier, the chief executive officer of Gavea.

The Senate probably won’t decide on Goldfajn’s nomination until mid-June, meaning he would miss the next rate decision that is scheduled for June 7-8, said Senator Gleisi Hoffmann, president of the chamber’s Economic Affairs Committee.

‘Dream Team’

Tombini, nominated in 2010, was often criticized for being lenient with inflation and was accused of caving in to political pressure by reducing interest rates to a record low too fast just to raise them six months later.

"One of the main issues of the central bank is that it lost the communications battle -- it was left unable to communicate its vision, and that eroded confidence," Gavea’s Bier said. "Ilan’s reputation will keep that from happening. I can’t think of a better name than his for the post."

He joins an economic cabinet dubbed a “dream team” in a note Tuesday by Goldman Sachs Group, Inc. It is led by Meirelles, who has made clear he plans to move aggressively to slash spending and debt levels to boost investor confidence. In an interview with Epoca magazine last week, Temer said that he fully trusts Meirelles and his team, and that they’ll have autonomy to make necessary adjustments.

"The economic team now is going to be much more coherent and consistent," said Joao Augusto de Castro Neves, a political analyst at consulting firm Eurasia Group. "There is room for infighting there, but I think Meirelles understands the value of that."

Market Rally

The finance ministry’s strategy to solve Brazil’s fiscal situation will have a big impact on whether the central bank loosens monetary policy, said Gavea’s Bier. Analysts in a central bank weekly survey have been trimming estimates for the so-called Selic rate, which they now say will fall to 13 percent this year and 11.50 percent the next.

Financial markets have rallied this year on speculation that a Temer-led economic team would impose policies to right the ship. The real and the Ibovespa stock index are the second-best performing currency and equity markets in the world in 2016, gaining 14 and 32 percent, respectively.

In an op-ed published last month in Estado de S. Paulo newspaper, Goldfajn put the rally in a more pragmatic context.

“It is not a moment to allow for market euphoria."

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