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Wish you were here

24 January 2014 By Rob Cox, Christopher Swann

Dilma Rousseff’s postcard from Davos may not reach home. In her debut at the World Economic Forum’s annual gathering, Brazil’s president preached to the capitalist choir. Promises of fiscal virtue, price stability and privatization should delight investors. An upcoming election, though, probably means it’ll take more emerging market turmoil before Rousseff really can become less populist.

Currency tumbles in developing economies around the world provided Rousseff with a little extra incentive to hit the right notes in Davos on Friday. Brazil’s real has been the fourth-biggest faller over the past week, after Argentina’s peso, Turkey’s lira and Russia’s ruble. Further declines will threaten price stability.

The free-market credentials asserted by Rousseff have some merit. Over the past year, her government has attracted more private capital to help the nation’s crumbling infrastructure. Five highway auctions and six airport concessions will reap $20 billion for the domestic treasury, Rousseff said. She vowed more deals would follow.

There are few indications beyond the rhetoric, however, that Rousseff is willing to take more painful steps. She won’t easily persuade investors when it comes to public finances or price stability. Overspending has forced the government to relax fiscal targets in recent years. Throw in the surge in lending from state development bank BNDES and Rousseff looks even less prudent. Despite some hints to the contrary in Davos, Rousseff will be reluctant to abandon such stimulus before Brazilians take to the polls in October.

An honest accounting of inflation, which is artificially suppressed by fuel subsidies, looks even less probable. Excluding such fuzzy prices, inflation in December ran at a worrying 7.3 percent, rather than the official 5.9 percent.

It also takes extreme optimism to believe Rousseff would be willing to slash generous government pensions, which lie beneath Brazil’s ultra-low domestic savings rate. And yet without such steps, Brazil will struggle to increase investment – the lowest as a percentage of GDP among major emerging markets, according to consultancy Capital Economics – without becoming dangerously reliant on foreign capital.

While Brazilian bankers in the alpine Congress Center may have been ready to fist-bump each other after Rousseff’s remarks, they may find the speech gets left behind in Switzerland.


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