beyondbrics

Guido Mantega, Brazil’s indomitable finance minister, could not help taking a dig at the expense of Christine Lagarde, the visiting International Monetary Fund managing director, on Thursday.

“It’s a great satisfaction to us that this time the IMF did not come to Brazil to bring money like in the past but to ask us to lend money to developed nations,” he told reporters with a grin.

Brazil has reason to feel good. With its large foreign exchange reserves and relatively buoyant economy, it is in fine shape to face the second global economic slowdown in only four years.

But that does not mean Brazil is off the hook. Mantega acknowledged this on Thursday when he announced a package of measures slashing taxes on consumer appliances, such as fridges, and removing the IOF transactions tax on stock trading, among other things.

Brazil’s economy is slowing fast, leading the central bank this week to cut interest rates for the third time even as inflation remains relatively high. The Workers Party (PT) led government knows that much of its success over the past decade or so has been due to an almost China-like social contract of power in exchange for delivering economic growth, especially jobs.

The PT government also knows that the latest relief package, worth only a piddling R$1bn ($555m), is not going to help much. Capital Economics gives its view under the headline “Brazil’s stimulus is small change”:

First, the numbers involved are pretty small – the finance ministry estimates the measures will cost R$1bn, equivalent to just 0.03 per cent of gross domestic product. Second, with this in mind, the significance of today’s package is more that it sends a signal that policymakers are concerned about the rapidly deteriorating outlook for world economy and that they will act to cushion the effects on Brazil. Finally, to the extent that this entails further fiscal stimulus measures, there will be correspondingly less space for monetary stimulus.

Clearly this is a band-aid measure designed to shore up spirits by recalling memories of the last crisis, when former president Luiz Inácio Lula da Silva tried to spur Brazil’s spendthrift consumers to continue buying stuff to offset slower growth.

But Brazilian policy-makers will be wary of offering too much fiscal stimulus this time around through either tax breaks or government spending. This would jeopardise the government’s cherished aim of bringing Brazil’s cripplingly high real interest rates down into single digits. A budgetary splurge could quickly drive up the country’s persistent inflation rate, which at 6.69 per cent in the year to mid-November is in excess of the upper end of the government’s target range of 6.5 per cent. Capital Economics could not state the dilemma better:

Looser fiscal policy makes it less likely that the government will be able to take advantage of the global downturn to achieve its long-stated aim of reducing Brazilian interest rates into single digit territory – and keeping them there.

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