Brazil’s economy: Stalled
Autor: Alice | Publicado: 2012-12-10T21:47:00-03:00


from: @TheEconomist

A long-awaited recovery still fails to materialise




FOR many months Guido Mantega, Brazil’s finance minister, has 
been forecasting that the economy is on the verge of vigorous growth 
that never seems to come. Even so, the third-quarter figures published 
on November 30th were a shock. The government had convinced independent 
economists that a weaker currency, lower interest rates, and a cut in 
sales tax on cars and white goods would prompt a healthy expansion of 
1.2% compared with the previous quarter. In the event, the figure was 
just 0.6%. The national statistics institute also slashed its estimate 
of second-quarter growth, from 0.4% to 0.2%.





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The numbers were “disappointing”, admitted Mr Mantega. But recovery, 
he insisted, is on the way: 4% growth will come next year, with 5% in 
2014. Few now believe him. Analysts are slashing their predictions (see 
chart). Add last year’s anaemic 2.7% and Brazil is seeing its worst 
growth performance in over a decade.



The nastiest surprise was the fall in investment, despite the 
government’s efforts to lower business costs. The Central Bank has 
reduced the policy interest rate from 12.5% in mid-2011 to a record low 
of 7.25%; it has also pushed state banks to cut spreads and to lend 
more. A tax on foreign-currency inflows and the Central Bank’s 
interventions have engineered a fall in the painfully strong real of 
around 20% since February. The government has cut payroll taxes for 
manufacturers, promises a big cut in electricity tariffs, and has turned
 to the private sector to ease transport congestion.



All this reads like a Brazilian businessman’s dream come true. So why
 has the hoped-for investment boom not materialised? The government’s 
high-handed approach and hostile attitude towards the private sector 
seem to have put off the very investors it hoped to attract. Brazil’s 
electricity prices, for example, are the world’s third-highest and a 
long-standing business bugbear. But the government’s plan to cut tariffs
 by 20% risks misfiring because it overestimated utility firms’ margins 
and underestimated the rate of return they would require to renew 
contracts early.



Some firms have decided not to sign up, even though that means they 
will probably lose their concessions when they expire. Eletrobras, a 
state-controlled giant, bowed to the government’s wishes over those of 
minority shareholders—and saw its share price plummet. “I fail to see 
how destroying shareholder value helps to attract investment,” says Tony
 Volpon of Nomura Securities, a broker.



Services, long the main source of new jobs, have stalled too. 
Financial services were hit by higher defaults, fewer loans and tighter 
profit margins. But the slowdown goes wider, says Silvia Matos of the 
Fundaçao Getúlio Vargas, a university. Past sources of productivity 
gains, such as easier registration for small companies and greater 
access to credit, have run their course, she says.



The only good news for the government was that consumption by 
households is still growing, albeit at a slower pace than in the recent 
past. That, and keeping inflation under control, are the recipe for 
political popularity in Brazil. Dilma Rousseff, the president, is indeed
 popular. More than three-quarters of respondents in opinion polls rate 
her as “good” or “excellent”. One poll last month found that 26% 
spontaneously named her as their preferred presidential candidate in 
2014—for the first time, more than cited her predecessor and mentor, 
Luiz Inácio Lula da Silva. Until recently she looked like a shoo-in for a
 second term.



But Ms Rousseff’s likeliest opponents have taken the confirmation of 
the economy’s continuing weakness as the starting gun for the 
presidential campaign. Eduardo Campos, governor of Pernambuco, a 
fast-growing north-eastern state, has been sounding statesmanlike on the
 importance of not putting off potential investors. A meeting on 
December 3rd of mayors from the Party of Brazilian Social Democracy, the
 biggest opposition group, turned into an impromptu coronation of Aécio 
Neves, a senator and former governor of Minas Gerais, Brazil’s 
third-richest state, as the party’s next leader and presidential 
candidate.



The following day Mr Neves spoke in the Senate about the 
“recklessness and folly” of the government’s actions in the electricity 
sector. Admittedly, one of the refusenik electricity companies is CEMIG,
 in which Minas Gerais’s government has a big stake. But unless Mr 
Mantega is finally vindicated and growth picks up soon, the economy will
 offer Ms Rousseff’s rivals an easy target.