Economic Management Fast Becoming a Negative for Brazil

Brazil’s economic conundrum–how to kick start a stalled economy without igniting more inflation–deepened Wednesday with release of disappointing growth data, adding a political dimension to already vexing policy problems.
Growth measured against the first quarter of 2012 was a disappointing 1.9%, severely undermining the government’s early-year hopes for 2013 growth of 3.5%. Meanwhile, inflation continues at 6.5%, the ceiling of the government’s 2.5%-to-6.5% target range for the year.
What it adds up to is a situation in which most Brazilians, including the administration of PresidentDilma Rousseff, are heading toward the worst of two worlds.
“The administration made a huge mistake by obsessively pursuing growth,” saidPaulo Faria-Tavares, managing partner of Sao Paulo’sPTX Lendingconsultants. “In doing so, they tolerated a high level of inflation.”
Now, the policy-makers face both low growth and rising prices, with all the unpalatable policy choices that implies. Higher interest rates and cuts in government spending could curb inflation but only at the risk of depressing growth even more, according to most economists.
It also adds up to increasing political uncertainty.
“The economic policy of stimulating consumption and boosting government spending is showing signs of exhaustion,” saidCelso Roma, a political scientist associated with Brazil’sNational Science and Technology Institute. “The state of the economy will have real consequences for the 2014 presidential election.”
President Rousseff was chosen by voters for a four-year term in 2014 as the hand-picked successor of popular PresidentLuiz Inacio Lula da Silva. The nation’s 7.5% growth rate that year helped.
After more than two years in office, her approval ratings have remained sky high at over 70%, but that could change if the present economic woes persist.
“Politically, of the two problems–slow growth and rising prices–inflation is worse,” saidAlexandre Barros, a Brasilia-based political risk analyst. “Inflation tells the man-in-the-street whether he will have enough money to meet his needs and his wishes. Credit availability is another important variable. It tells you whether you can buy a household appliance or a new car.”
Unfortunately, for Brazilians, and the political fortunes of its governing Workers’ Party administration, credit is likely to tighten through the end of the year, precisely because of the inflation problem. Brazil’s central bank meets Wednesday night to review monetary policy and is widely expected to hike its Selic base interest rate, which is already high at 7.5%.
Also embattled is Finance MinisterGuido Mantega.
“His performance is being increasingly questioned by business leaders, given his errors in forecasting, lack of rigor on inflation and, now, low levels of economic growth,” said Mr. Roma. “If that judgement spreads to public opinion, then he could find himself replaced.”
By whom? Or better, by what?
Mr. Barros believes a leading candidate would be the president of the state-runNational Development Bank, experienced economistLuciano Coutinho, who is known to be a close friend and counselor to President Rousseff. “The only problem is that Coutinho is even more ideological than Mantega,” said Mr. Barros, which could make the pattern of state intervention in the economy even more prominent than it is today.