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CFA Institute’s Event in Rio

Zeina Latif (XP Investimentos): “Brazil Tends to Fail Managing Success, But it is Not that Bad Managing Crisis”

Photo: Zeina Latif, Chief Economist at XP Investimentos, at the “2018 Latin America Investment Conference”, an event jointly hosted by the CFA Institute and the CFA Society of Brazil
  • “We have clearly a problem of sustainability of public debt and the pension reform is the bedrock of the fiscal adjustment”
  • “Markets have given the benefit of the doubt and are expecting the pension reform to be accomplished for the next president”
  • “Brazil needs higher productivity gains to compensate for the end of the demographic dividend”
By Funds Society

According to Zeina Latif, Chief Economist at XP Investimentos, Brazil tends to fail in terms of managing success, but it is not that bad managing crisis. “If you take Cardoso's or Lula's first administration mandate, both started with huge challenges and they ended well, and we saw the reflection and the outcome of their policies. So, I think that ironically, the most serious fiscal crisis of Brazil’s recent history has a good side of the story, as it leads to force Brazil into rethink government intervention in economy and into eliminating those policies that are inefficient. It is really challenging, but the history tells us that we can do it. Our problem is that we cannot manage very well periods of success”, she stated at the “2018 Latin America Investment Conference”, an event jointly hosted by the CFA Institute and the CFA Society of Brazil in Rio de Janeiro.

Brazil suffered a significant draw on its productivity after being affected by the measures taken by former President Dilma Rousseff. The new government implemented a material shift in economic policies that are believed to be working, and that soon will bring some improvement in productivity as well. Unorthodox price policies that led to a high consumer inflation were removed, the new government understood that this issue was the first thing that needed to be tackled. “Regarding consumer inflation, we need to understand that the current decrease was not because the Central Bank was lucky, or because the forex exchange behaved favorably against other major currencies. We need to recognize that this low inflation is like the patient’s fever that is receding because the doctor was right on its diagnosis and on the treatment as well. This government understood the urge of the tackling fiscal prices and their strategy was correct”, Zeina added.  

What can be expected for the coming years in Brazil?

Brazil is facing one of the most serious fiscal crisis in its history. In October, voters will elect another president who will have to face significant challenges. “Brazil needs really bad to stabilize its debt to GDP ratio, otherwise, macroeconomic stability will not be possible. We have clearly a problem of sustainability of public debt and the pension reform is the bedrock of the fiscal adjustment. I do not have many doubts that the next president will need to remember that politicians always consider cost-benefits of their decisions. In terms of political ambitions, is not really a good idea for President Temer to approve a pension reform now. It would have a huge political cost and the benefits will be reflected in the mandate of next president. In a scenario in which markets were really concerned about this issue, there would be a significant benefit of doing the pension reform this year, but clearly this is not the case. Markets have given the benefit of the doubt and are expecting this reform to be accomplished for the next president. But, anyway, this is something critical, we will not be able to see sustainable growth in Brazil while there is macroeconomic instability”, she said.

Brazil needs to look forward and implement structural reforms, the good news is that the current administration has already started. Brazil needs higher productivity gains to compensate for the end of the demographic dividend, the gap between working force and people out of the labor force is going to decrease in the next five years, and it means lower growth potential for Brazil. The next government will need to accelerate reforms to prepare the country towards the end of the demographic bonds, otherwise potential growth in Brazil’s GDP will be 1% or 1,5%, a mediocre growth rate for an emerging economy. Other matter that will be crucial for Brazil will be to open the economy for international trade, as the country needs to increase competition. 

“I believe this is one of the most critical moments in Brazil history, but I also think there is a good chance of seeing good news in the next government. In my opinion, the risk of populism has decreased a lot. We see this more stable economic environment, in which unemployment rates and the fear of losing jobs still very high, but we are not seeing protests in the streets. We are seeing society that has calmed down”.

Economy is an important subject in Brazil, a country that has gone through two impeachment processes since its democratization and in both cases the processes were initiated following a collapse in the economy. “Now we have a president that has one digit of approval rate, but the streets are not asking for his ouster. All the possible candidates for presidency are looking for talented and renowned economists to be their finance minister. Politicians understand that there is no room for more mistake on the economic policy and they are trying to show their vision on the economy”. 

Finally, the golden rule, a constitutional rule established to avoid the issuance of new bonds by the government to finance current expending, acts as a cap. The next president elected will need to gain flexibilization on the golden rule. Also, there is a significant change in the economic debate. “We are now discussing structural reforms on macroeconomic policies and pensions, and it is something that really matters, because 10 years ago, when Fernando Henrique Cardoso tried to approve a pension reform neither the press nor the private sector supported him. They did not understand the need for a reform. Today, nobody is denying the need of reforms. Politicians in Brazil have become very pragmatic and they use cost-benefit analysis all the time. The discussion is whether the next president will be ambitious enough and will have political conditions to do something different. Today, the question is whether it is going to be a good reform or not, and it is a completely different question. Although the challenges are huge, Brazil is better positioned to tackle these obstacles. Our politicians are not ideological, they are pragmatic”, she concluded.

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