Rousseff's mission for Brazil in 2012: 4 percent growth

Reuters News
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Posted: Jan 23, 2012 2:43 AM
Rousseff's mission for Brazil in 2012: 4 percent growth

By Brian Winter

BRASILIA (Reuters) - Brazilian President Dilma Rousseff has made 4 percent economic growth her government's main mission this year and is willing to cut taxes, take stimulus measures and possibly sacrifice other targets if needed, government sources tell Reuters.

Rousseff gathered with several ministers at the presidential palace in Brasilia over the weekend, putting together what one official called the "business plan for 2012" as Brazil's summer holidays draw to a close.

Rousseff could decide on specific measures in coming days and officials, speaking on condition of anonymity, said the career economist is determined that Brazil's economy will perform better than it did during her first year in office in 2011, when growth was likely about 3 percent.

"The number in everybody's head is four," one official said. "Almost everything else we're doing will revolve around that."

Officials say they will pursue that goal responsibly, and will be flexible in the event of external crises in Europe or elsewhere. The policy options on the table - from tax incentives for struggling industries to greater lending through the BNDES state development bank, among others - will be deployed carefully without spoiling Brazil's reputation for consistently well-run, slightly left-of-center economic management, they say.

Nevertheless, the growth-first approach will likely mean risks for financial markets this year. They could include sudden and unpredictable economic policy shifts or another spell of high inflation after prices rose at 6.5 percent in 2011, the fastest pace in seven years.

Rousseff's target is well above most independent forecasts. The United Nations expects just 2.7 percent gross domestic product growth for Brazil this year. That means the government may engage in heavier than expected stimulus, especially if the euro zone crisis worsens or China's economy slows.

The stimulus could, in turn, cause Brazil to narrowly miss its year-end primary budget surplus target of 3.1 percent of GDP.

After a remarkable run of success in recent years, it is unclear whether Latin America's largest economy is still capable of growth of 4 percent a year or more without deep reforms.

Severe infrastructure problems, record-low unemployment, high credit demand and other structural bottlenecks meant that even last year's timid growth came with inflation right at the top of the government's target range.

For now, though, Rousseff's advisers say they believe they can have it all in 2012 - a kind of "Goldilocks economy" in which both inflation and interest rates fall, while growth rises. They say that Rousseff will be involved in managing the economy on a regular basis, just as she was last year, and will be willing to tweak the twin levers of stimulus and restraint as circumstances dictate to allow for healthy growth.

When feasible, though, the government will err delicately on the side of economic expansion.

"Brazil wants to be seen as a safe country that grows," Treasury Secretary Arno Augustin said in a newspaper interview this month. Reminded of that quote, a separate official said: "That's right," then smiled and added "Well, maybe it's better to say 'a country that grows and is safe.'"

BRAZILIANS REMAIN HIGHLY OPTIMISTIC

Rousseff's decision to put economic growth first is rooted in her vision of the global economy, as well as Brazilian public attitudes about her government and their own well-being.

Despite a rough patch last year that saw the economy notch zero growth in the third quarter, Brazilians remain optimistic. A Datafolha poll published on Sunday showed that 83 percent of people think the economy will either stay the same or improve - the highest level since Rousseff took office a year ago.

That number rose to 90 percent when Brazilians were asked about their own financial situation - another record high. The zeitgeist is still very much that of a country enjoying a historic economic boom.

Sunday's newspapers were full of celebratory headlines. "In a decade, 10 million people have come out of extreme poverty," read the front page of Estado de S.Paulo. Folha de S.Paulo led with news that 59 percent of Brazilians consider Rousseff's government "great" or "good" - more than her exalted predecessor, Luiz Inacio Lula da Silva, at a similar stage of his presidency.

Rousseff's advisers believe that continued growth is the key to maintaining that support. They look in horror at the United States and Europe, where they believe fiscal orthodoxy have trapped countries in a low-growth quagmire.

"As long as the economy is in good shape, (Rousseff) looks to be in charge, the business sector doesn't apply pressure, the workers have jobs and money ... and the opposition doesn't have anything to say," Folha columnist Eliane Cantanhede wrote.

INDUSTRY, COMMODITIES EXPORTS ALREADY IN TROUBLE

At the same time, everyone knows the good times are fragile.

Industrial production has been flat for the better part of three years due to an overvalued exchange rate, high taxes and other costs that make Brazil an increasingly expensive and difficult place to do business.

If prices for Brazil's commodities exports stay flat or decline this year, that could leave consumer demand as the only remaining major engine for the economy. Under that scenario, stimulative measures could eventually lead to bubbles in areas such as real estate or lending for lower-income groups.

Data in recent weeks indicates that Brazilians are taking on less debt, spending less and paying off more liabilities - which economists say reduces the odds of a credit bubble taking shape. Still, Rousseff's officials say they are aware of the risks, and will monitor them closely.

Rousseff's penchant for sudden policy shifts has been cited by investors as a growing risk to doing business here. Her decision last year to reduce the mix of ethanol in local fuels, for example, was intended to subdue inflation but also unsettled biofuels companies. [ID:nN1E79D08N]

Considerations over unpredictability seem to be in the back seat for now. Officials are mindful that a second year of sub-par growth could spell political trouble for a leader who, lacking Lula's charisma, has staked her presidency on her reputation as an effective economic manager.

The first half of the year will be especially critical, in part because officials expect that is when Europe's economic crisis will be at its worst. Municipal elections in October will enhance the need for economic growth in order to favor candidates in Rousseff's coalition.

As a result, the government's annual budget spending freeze - in which some expenditures are declared frozen as a gesture to investors - could be backloaded in 2012 to ensure that growth remains vibrant in the first six months.

"This is a serious government, and we're going to do everything possible to meet all of our targets this year," a third official said. "What distinguishes Brazil from the rest of the world is that our economy is growing, too."

(Reporting by Brian Winter; Editing by Todd Benson and Kieran Murray)