Brazil: Back to the Past

The Ministry of Finance is concerned about a possible interest rate hike, by the Central Bank, as a way to control inflation. They were also considering measures to decrease the financing period for consumer credit. Such measure would be a setback, since its impacts would be negligible, it would be inefficient and would increase income concentration. By vetoing it, the president did well.

There are many indications that aggregate demand is expanding more than supply. Part of the increase in demand is being met by greater imports. Greater imports are also positive, since they boost investment, productivity and expand installed capacity. Besides, greater imports tend to reduce pressures on prices. However, these positive effects from imports might not be enough to offset the excess demand, which tends to create inflationary pressures, an issue of concern for the Central Bank (expressed in the COPOM minutes) and raise the possibility of interest rate hikes to curb inflation.

The strong boom in aggregate demand is mainly due to two factors. The first is the increase in the purchase power due to greater export prices, reducing risk premiums and appreciating the exchange rate. Greater export prices also tend to increase real wages and improve the overall business and investment climate. The second factor is the ongoing expansion of the National Treasury primary expenses. These expenses, over GDP, are growing at a fast rate of 0.8% of GDP per annum and almost all of them are composed by current expenses. While the first factor is positive for the country, the second is not. This is so because increasing public expenses require continuous increases in the tax burden, inhibiting the private sector and demanding higher interest rates to control aggregate demand. Therefore, the most logical would be for the Ministry of Finance team to be foremost in charge of controlling these expenses (and the tax burden) as well as decreasing them as a share of GDP. As such, the Ministry of Finance would be helping the Central Bank towards preserving economic stability and favoring economic growth. However, reduction of public expenses is something that seems to be out of question.

Yet the main government reform – done during the first term – was the one related to credit. They changed the legislation to allow an easier, faster and more efficient execution of the guarantees in case the debtor is insolvent. In addition to preserving macroeconomic stability, the reform significantly expanded credit supply in Brazil, decreasing its cost and allowing more choices to the creditors regarding the financing plans and terms of payments. Besides all the beneficial effects the reform brought into the economy, a greater supply of credit allowed a new share of the population – with low income and so far excluded from the whole process – to join the process. Clearly similar to a new technology that has positive impacts on investment, cheaper credit tends to boost consumption. However, both aspects are positive to the economy and tend to increase income and welfare. The idea vetoed by the president intended to limit on a mandatory basis the financing conditions for the creditors. The change in the credit conditions would be useless given the other factors that are boosting aggregate demand, inefficient and would dilute the benefits of the first term credit reform. Some may justify the measure as a way to defend consumers and banks under the argument that debtors are unable of doing calculations and forecasts for the financing, and that creditors would be reckless, granting loans without proper collateral. Besides arrogant, this view carries a lot of prejudice. Supervision regarding the correct level of guarantees is already done by the Central Bank and by the commercial banks internal controls. The greatest defaults in Brazil did not happen, historically, due to consumers’ bankruptcy but due to governments, their entities and private groups. One can see the volume of ‘precatorios’ in the states and the municipalities that are being forecasted to reach more than R$ 100 billion and the constant renegotiations, under pressure, with the farmers.

The Brazilian economic policy has traditionally preserved a bias against the poor. Indeed, the measure to limit payment plans, which would hurt the lower income classes also follows this tradition. Interesting that, at the same time, the government raises the possibility of creating new export incentives, despite the significant growth (in the aggregate level) of exports. The goal seems to be linked with the idea of offsetting the exchange rate effect and to subsidize sectors or industrial activities considered priorities by the government. It is a mystery on how those subsidies can help curbing inflation. The simultaneous announcement that there would be a limit to restrict credit on consumers and, at the same, time an increase in the BNDES subsidized operations, with the support of trade associations show how easy and acceptable is to take from poor to give to the rich.

The two measures discussed above are inserted in a broader context of guiding the economic policy. Different from the policy followed since 1999, which set the exchange rate floating according to the market and executed monetary policy horizontally, using the classical tools , like interest rates, the current administration apparently prefer micro management the system, with constant interventions. An increase in the price of iron ore? The government calls the iron-ore producers, with an implicitthreat to impose price controls, instead. The exchange rate is appreciating? There is an increase of import tariffs and export subsidies in the sectors that are ‘worthy’, and the government issues internal debt to increase international reserves in a useless and expensive arbitrage for the country. Instead of increasing interest rates, they impose a selective control on credit. It is a mirror image of the economic policy from the 70s and 80s, with all the distortions and inefficiencies that led to disaster.

Instead of keep building on the top of institutional reforms implemented in the past, including the ones done by the current one, the government is in love with a failed model of economic policy that is doomed to fail again. We can only root for the ongoing international scenario to be positive to Brazil, given that it is highly unlikely that something positive will emerge in our own backyard.


Originally published by Valor Economico and translated to English by RGE monitor.