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Brazil's resilience

IMF says Resilience Bodes well for Brazil’s Recovery

May 25 2016

Financial Times – The International Monetary Fund has stated that Brazil’s “amazing” resilience in attracting foreign direct investment despite a crushing political and economic crisis bodes well for Brazil’s recovery in the aftermath of the decision on President Dilma Rousseff’s impeachment.

The fund’s western hemisphere director, Alejandro Werner told the Financial Times that should Ms Rousseff stay or leave, the ability of Latin America’s biggest economy to bounce back hinges on its ability to hammer out political consensus on a medium-term package of spending cuts, tax rises and anti-protectionist measures.

“It’s amazing that we are seeing the level of Foreign Direct Investment (FDI) even with everything that is going on,” Mr Werner said in Mexico City after presenting the fund’s regional economic outlook which projects Brazil’s economy will shrink 3.8 per cent this year.

Brazil’s FDI inflows rose to $17bn in the first quarter from $13.1bn in the same period last year, despite an accelerating political drama since the start of 2016. By contrast Mexico, Latin America’s second-biggest economy, where the IMF expects 2.4 per cent growth this year, saw FDI grow by less than $3bn last year compared with 2014 levels, according to Goldman Sachs.

“People are seeing very good opportunities, looking at the medium run, and maybe a lot of people missed the opportunity to get into Brazil 10 years ago and now see a transitory crisis as a good way to put their feet into Brazil, to be there for the next 10 years,” Mr Werner added.

The Brazilian real has depreciated about 21 per cent against the US dollar in the past year but has rallied about 12 per cent since the start of 2016 as markets bet on Ms Rousseff’s impeachment.

Mr Werner did not expect the IMF to have to extend any kind of financial lifeline to the economy. “Our traditional instruments to help a country go through a balance of payments crisis are not needed in Brazil,” he said, highlighting the central bank’s $375bn in international reserves and a healthy financial system before the current crisis.

“Brazil today does not need money, it needs policies,” he added. And, noting positive investor response to Ms Rousseff’s efforts early in her second term, he added: “If the right policies are there, we have seen that the market buys them.”

Mr Werner said the IMF had heard policy plans from the government and its former main coalition partner, the PMDB, from which Mr Temer hails, and across the political spectrum. “I think a lot of these programmes have many of the right ingredients to put Brazil back on the path towards stability,” he said.

His own recommendations, however, are simple: a multiyear fiscal programme including an “important correction in expenditure” together with higher taxes, combined with cuts to pensions and other entitlements that Brazil cannot afford.

In addition, Brazil must look outwards — as Mexico and Chile, two of the region’s most solid economies, have done over the past two decades.

“The Brazilian economy needs to open up to trade much more than it has. It’s an extremely closed economy,” Mr Werner said. That could mean unilateral action on tariffs to start with, but should include negotiations towards free-trade agreements, he said.

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