Oct 15th 2009 SÃO PAULO
With the return of growth comes a different set of problems. They include the political ambition of Henrique Meirelles, the governor of the Central Bank
IN MOST countries the dogged pursuit of an inflation target is not a help in seeking high elected office. But it seems Brazil may be different. On September 29th Henrique Meirelles, the governor of the Central Bank, announced that he was joining the Party of the Brazilian Democratic Movement, a coagulation of regional barons that is the country’s largest political outfit. In a general election next October he is expected to run for governor of his home state of Goiás, although he may try for the senate or even the vice-presidency.
Mr Meirelles, a former boss of BankBoston, had been elected to congress for an opposition party before being plucked to head the Central Bank in 2002 by President Luiz Inácio Lula da Silva to satisfy investors that a left-wing president would not shy from monetary rigour. Mr Meirelles promptly raised interest rates to painful levels to scotch inflation and settle financial markets. It is a sign of the times that this did not destroy his political ambitions.
Stardust has recently settled on the shoulders of everyone in economic policy-making in Brazil. Foreign direct investment in the country has grown, even as it has shrunk worldwide. As many jobs are now being created as were before the economy plunged in the final quarter of 2008. Unlike in past downturns, the government’s fiscal position was strong enough to allow it to pump up spending to see off trouble.
Similarly, the Central Bank used to have to raise interest rates to discourage capital from leaving the country: this time it brought them down. Partly because of these policies, Brazil’s recession has been short. The economy is likely to have returned to an annualised growth rate of 5% or so in the third quarter.
This strong rebound is bringing with it different dilemmas from those under debate in Europe, North America or China. The real has strengthened against the dollar (see chart). Brazil’s current-account deficit is widening again and is likely to continue to do so. As the economy starts to hum, many analysts expect the Central Bank to have to raise interest rates again.
Each of these brings its own problems. Exporters and manufacturers complain bitterly about the strong real. The government is sympathetic, and the finance ministry has hinted that it will do something to help them. Full-blown capital controls are unlikely, though there is talk of a sovereign-wealth fund that could lean against currency appreciation. But voters might find it hard to understand why the government was saving rather than spending.
The managers of such a fund might also come to blows with the Central Bank, where practice has been to intervene in foreign-exchange markets to prevent wild swings in the value of the currency. A strong real has many benefits. It helps to keep inflation low and boosts imports of capital goods. But producer lobbies tend to be more vocal than consumers.
A widening current-account deficit financed by foreign capital is also a source of worry to many Brazilian policymakers. They learned how such arrangements could backfire long before investors fled Asia in 1997, spreading turmoil and eventually forcing Brazil to abandon its exchange-rate peg. From the oil shocks of the 1970s to Argentina’s default in 2002, Brazil has repeatedly fallen victim to such swings in sentiment. As foreign investors pull their money out, the Central Bank yanks up interest rates to discourage them and recession follows.
Some economists argue that the way to prevent this happening again might be to encourage the right type of foreign money (investments in factories that cannot be pulled at the first sign of trouble) and to discourage the wrong type (short-term speculative capital). But this distinction is hard to make in practice and even harder to legislate for. Investment bankers like nothing better than the challenge of creating products to get around rules designed to restrain their clients.
Lastly there is the question of interest rates. Though the bank’s benchmark rate of 8.75% is a record low, it remains high by the standards of anywhere else. Recovery might require rates to be raised, as soon as April. That is where Mr Meirelles’s political ambitions start to look awkward. For a presidential appointee to raise rates in an election year requires some steel. It might be even harder if he is himself a candidate.
Lula has asked Mr Meirelles to stay until the end of the presidential term in December 2010. He has until March to stand down if he wants to be a candidate. If he does, Brazil faces the prospect of having three different Central Bank governors in a year. If Mr Meirelles goes in March, a possible successor is Luciano Coutinho who heads BNDES, Brazil’s development bank. Were the opposition to win the presidency next year, it would probably want to name its own man. Happily, Brazil is now stable enough that such upheaval would not be fatal. But it might carry a price.
From The Economist print edition
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