Brazil returns to “pragmatic” policies to calm markets and attract investors

Just before 2013 ends and a new electoral year begins, the Brazilian government has begun to adopt direct objectives to soften its key economic principles, which have created market tensions.

As it awaits word expected on Wednesday from the Fed in the United States over whether there will be changes to Washington’s monetary policy, President Dilma Rousseff’s government has been showing signs that it is ready to respond to the criticism its policies have received.

In a recent interview with São Paulo daily O Estado, Economy Minister Guido Mantega announced that certain practices used to help Brazil build up its budget surplus over the years will no longer be followed. While he emphasized that these methods were legal, Mantega acknowledged that they have caused confusion among investors. From now on, he said, the presentation of accounts would be straightforward.

Some weeks back state oil company Petrobras had to adjust its prices – after years of keeping them stable – because the government feared that their high levels could affect inflation. Despite the oil firm’s billion-dollar plans to modernize, Petrobras dropped its prices at the end of November – although by less than what was necessary – to answer market demands.

Economic policy adjustments have been put on the fast track and the Rousseff government believes there is no time to lose. “Pragmatic policies are returning,” said Zeina Latif, a partner at Gibraltar Consulting.

But what could be sweet news to investors has come late. According to many analysts, the government kept its consumer incentive policies on the books too long. This was a stimulus that allowed Brazilians to purchase goods such as cars and electrical appliances at fair prices, while at the same time offering subsidies to some sectors of the economy that were having a difficult time.

Over the past three years, the Rousseff administration has created four million jobs, which explains the president’s high popularity ratings in all polls. One recent survey conducted by Ibope Institute shows that 56 percent of Brazilians approve of her government.

But the markets and the private sector, however, don’t share the same opinion. While both investors and private sector officials are not typical sources of votes for politicians, their perception is important to maintaining economic stability and expanding investment, which in the long run will make it easier to guarantee jobs.

In the pie that makes up Brazil’s GDP, 19.1 percent accounts for foreign investment. That figure is lower than the 24 percent Rousseff projected in 2010 when she was a presidential candidate.

As a result, the growth of Brazil’s GDP has slowed pace, as demonstrated by the last third quarter results, which show that the economy fell 0.5 percent but will still close out the year with expected growth of more than two percent.

Even though there has been some recovery over the past few months, the government isn’t satisfied with the final growth number. “It is a mediocre figure,” said Luiz Eduardo Assis, a former manager at Brazil’s Central Bank who is now with ABC bank.

While the country has generated millions of jobs and Brazilians are optimistic about their future, there exists a feeling of helplessness following 2010, the Brazilian economy’s boom year. The nation closed out that year with economic growth of 7.5 percent while the United States and Europe were dogged down in the middle of a brutal financial crisis. It was sweet revenge for a nation punished during the 1980s and 1990s by austerity policies imposed by the World Bank and International Monetary Fund.

But in the next two years, the economy began losing steam. Brazil’s economy grew by 2.7 percent in 2011 and by 0.9 percent last year.

“We are still there, far off from reaching our goals of 22 percent or 23 percent for foreign investment or even enough to make four percent growth this year,” said Claudio Frischtack of the consulting firm InterB. “The only way this could happen would be via a return to the inflationary policies of the past.” In other words, he explained, those who want to invest in Brazil will have to be convinced that there will be growth – but at a slow rate.