ADVERTISEMENT

Brazil’s Campos Neto Warns of Market Wrath If Spending Not Cut

Brazil Needs Austerity After Pandemic, Central Bank Head Says

Central bank President Roberto Campos Neto said Brazil must resume fiscal austerity following this year’s record pandemic spending or risk being punished by financial markets.

Brazil’s emergency measures are all set to expire by the end of 2020 and lawmakers have signaled they won’t be extended, Campos Neto, 51, said on Wednesday at the Bloomberg Emerging + Frontier Forum. He added that history has shown that growth driven by public spending hasn’t worked in Brazil.

“We had a detour,” he said. “But now we need to understand that we need to go back to the original plan.”

Brazil’s Campos Neto Warns of Market Wrath If Spending Not Cut

On Campos Neto’s watch, the central bank has cut its interest rate to a record low, freed up billions of dollars in reserve requirements and implemented additional measures to help the flow of credit during the pandemic. Meanwhile, the government has spent billions of dollars on stimulus measures to boost the economy, including monthly stipends and employment subsidies that have driven down poverty.

Disagreements between President Jair Bolsonaro and Economy Minister Paulo Guedes over how to finance social spending next year have prompted market fears that fiscal anchors including a public spending cap may be in danger.

Such concerns have contributed to a sell-off in local assets, with the real nearly breaching the level of 6 per dollar in May and again weakening past 5.5 last month. The central bank intervened in both occasions by selling dollars from its foreign reserves.

Campos Neto said that while the central bank doesn’t target a specific level for the Brazilian currency, it was prepared to “intervene even more heavily” if needed to eliminate what he described as “market discontinuity.”

Even though currency volatility is “a little higher than it should be,” he added, it should stabilize after Brazil’s legislature approves projects that indicate seriousness about fiscal discipline. Policy-wise, he said he intends to stay the course, keeping “the principle of separation, in which the monetary policy is for interest rates and the FX is floating, and financial stability is related to macroprudential measures.”

Faster Recovery

Speaking one day after data showed Latin America’s largest economy contracted more than expected in the second quarter, Campos Neto said he sees anecdotal evidence that the third quarter will be positive and that gross domestic product will shrink close to 5% during the whole year, less than the central bank’s own forecast for a 6.4% drop.

For 2021, he estimates the economy will grow “a little more than 4%,” which is more than the 3.5% expansion currently forecast by economists.

While Brazil’s economy may outperform those of its neighbors, the country faces one of the world’s worst coronavirus outbreaks: the total number of cases is expected to surpass 4 million this week and the number of fatalities nears 123,000, according to health ministry data.

A mishmash of lockdown measures implemented at the start of the outbreak crushed growth drivers, such as family consumption and investments. But many of those restrictions have been lifted by now, allowing for a rebound of the retail sector.

Yet Brazil’s economy could still slow down, Campos Neto cautioned, if there’s a second wave of the coronavirus or if austerity plans fall short of market expectations. Everything depends on “external factors and internal factors -- the way the economic agents see our program, the credibility we can generate and the way these variables interact.”

©2020 Bloomberg L.P.