Rousseff and Neves diverge on solutions to get economy back on track

The two candidates that will compete for the presidency in the second round don’t converge in their diagnosis of the ills of the economy. For re-election candidate President Dilma Rousseff (Workers’ Party, PT), the main problem that undermined the country’s growth, leading it to the recession, was the rich countries’ economic fragility. She has recently stated that the government did not need to promote a “deep” fiscal adjustment and believed that Brazil is ready for a new development cycle.

To Aécio Neves (Brazilian Social Democracy Party, PSDB) in contrast, the country is condemned to mediocre growth, high inflation and at the brink of a fiscal crisis, unable to move forward in the improvement of economic and social indicators in the medium term, if nothing is done immediately. 

Mr. Neves advocate a gradual adjustment over two to three years to recover the State’s ability to produce a primary surplus of 3% of GDP, as already indicated by his economic advisor and former Central Bank president Armínio Fraga, who will be appointed as Finance Minister if the PSDB wins in the second round on October 26.

A first step is to know the reality of public accounts, because the current administration may have postponed about R$100 billion in subsidy payments. Mr. Fraga has said that these expenses will be included in the accounts in a transparent way. Another idea is to limit the spending growth as a percentage of GDP, not through a decree but in the day-by-day management.

Advisors linked to the PT, unlike Ms. Rousseff, admit that the fiscal situation is serious and also warn that the trajectory growth of net debt as a proportion of GDP, if nothing is done, will lead the country into a fiscal crisis with adverse outcomes: an increase of the already high interest rates, currency devaluation and more inflation. From January to August, the net debt-to-GDP ratio rose two percentage points, a process that if it’s not stopped, it would end up in a “negative spiral,” the source said.

Some measures can help improve public accounts, which have undergone a significant deterioration since 2012, like the end of controlling fuel prices. But such measures are insufficient.

In 2011 the central government (National Treasury, Social Security and Central Bank), had an “adjusted” primary surplus (excluding revenues from concessions and asset operations) of 2.2% of GDP. The large incentives and exemptions, the control of administered prices and the low activity growth led this result to less than 1% of GDP this year.

The adoption of a multi-year fiscal program is advocated by economists from both the government and the opposition. It would be a way to signal the gradual return to sufficient surpluses to stabilize the public debt-to-GDP ratio and thus again have a scenario with no solvency risk of the country in the future.

The fiscal challenge is the most complex and delicate that the next president will face, but it is certainly not the only one. There are numerous other issues to resolve. One example is the more than two dozen current sectorial industrial policies that had no effect, with the manufacturing industry in contraction for a long time. Not to mention that the investment rate does not grow, the economy’s productivity decline and the urgent need of a tax reform, among others.

If to Ms. Rousseff the country is close to a new growth cycle, for the opposition Brazil is drowning in the lack of dynamism, so it needs reforms and to bring back the macroeconomic tripod.

Whoever wins the runoff will have to start to govern before donning the presidential sash. By December it must be decided what gasoline adjustment will be and if there will be a more automatic mechanism for fuel-price correction.

The next president will have also to negotiate with Congress a reduction in this year’s primary surplus target, because the minimum allowed by the Budget Directives Law (LDO) will not be achieved. Another measure that cannot wait for the presidential inauguration refers to the 2015 Budget, whose revenues are overestimated and the LDO also set a primary surplus target difficult to achieve, between 2% and 2.5% of GDP. All these changes have to be carried out in parallel with the definition of the economic team.

In the case Dilma Rousseff is re-elected, the transition is likely to be made by  current Finance Minister Guido Mantega, but he will not keep the post in the next government. The president wants an entrepreneur in charge of the economy.

Mr. Neves has already said he would appoint economist Armínio Fraga for the Finance Ministry and some experts who advised the candidate’s program are expected to be invited to join the government team.

The elected president will have also to deal with the uncertainties that could significantly affect the performance, as well as the political scene next year. The investigation of allegedly misuse of Petrobras funds, the behavior of interest rates in the US and its impact on Brazil, as well as the unfolding crisis in water supply in the country can be seen today as the biggest unknowns for the new president.

The gasoline price hike is likely to happen in November. The discussion on the 2015 Budget 2015 and the primary surplus may also begin in November, when the government must publish a reassessment of its income and expenses.

Ms. Rousseff has not disclosed the government program for a potential second term and has argued that it could be identified in the proposal for the 2015 Budget. The problem is that the bill sent to Congress is based on unreal premises. It projects a nominal increase of 12.2% of the Union’s total revenue, a 6% increase in real terms – a nearly impossible estimate for a GDP that the market bets it will grow 1% next year. The Budget rapporteur in Congress, in turn, has already raised revenues by another R$16.4 billion.

It remains unclear what the scope and the political and economic ramifications will be after the plea bargaining agreed with Paulo Roberto da Costa, former Petrobras director. On the international market, the increase in interest rates in the US may happen in late 2015.

The lack of rain in the last two years cost R$61 billion to the government, according to calculations of Federal Court of Accounts (TCU). These costs will begin to be passed on to consumers in 2015.

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By Claudia Safatle | Brasília



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