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Minister of Finance and Chairman of Central Bank specified priorities

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In his recently visits to Rio and  São Paulo (first week of April 2017) , the minister of Finance Henrique Meirelles talked to economists, businessmen and journalists.  What did he say to them:

By 4Q2017 Brazil’s GDP will be growing  at a rate of 2.7 per cent. His growth estimate to 2018: 3 per cent.

The government’s objective is to reduce the total level of expenditure as a percentage of  the Gross Domestic Product (GDP).

Less expenditures means less requirement for taxation, lower taxes in the future.

For the first time in history, there is a ceiling on government expenses.

The most important reform is that of Brazil’s pension system. Obviously to do it is not a simple ask. Demand people to work longer  is not a very popular request.

The first part of the labour reform was already approved (outsorcing). THE Second part (yet to be approved) is get  agreement between employees and employers prevailing over the fixed rules.

One fundamental point of the (pension system) reform:  private and public sectors must have the same rules. Other fundamental point: a minimum age for retirement, regardless the time of contribution (the proposed one is 65 years old).

We need to change our tax code, a notoriously difficult task that has been postponed for decades.

State owned companies are now folling much stricter governance rules.

New rules for offshore drilling were approved, decreasing condition for Petrobras participation.

 

The Chairman of the Central Bank, Ilan Goldfajn made a presentation in the Committee of Economic Affairs of the Federal Senate (on April 4). The main points of his presentation were:

Brazil is today less vulnerable to external shocks than in the recent past.

The deficit on current accounts was reduced to a third of the level it was at the end of 2015. In February 2017 this deficit represented 1.2% of GDP

Direct investments reached 4.6% of GDP, and international reserves exceeded $ 370 billion, approximately 20% of GDP.

The scenario seems for global growth, with rising commodity prices, which would benefit some emerging countries, including Brazil.

Brazil is in a moment of stabilization, with the recovery of its economic fundamentals.

Inflation is being contained: it fell from 10.7% in December 2015 to 4.8% in February 2017. It is expected that at the end of the year it will be around 4.1%.

The Central Bank started at the end of 2016 a process of sustainable monetary easing that has already accumulated a drop of 200 points in the Selic rate to date.

With the gradual stabilization of the economy, a gradual resumption of economic activity can be expected throughout 2017, and more vigorous growth in 2018.

Employment has grown for the first time since March 2015. It is necessary to continue the adjustments and macroeconomic reforms, especially the fiscal ones, such as the pension reform. 

In addition to fiscal measures, microeconomic reforms related to efficiency gains, flexibility of the economy and improvement of the business environment are necessary.

Structural reforms are needed to increase productivity and sustain growth. It is also important to make investments in infrastructure, through concessions and other mechanisms. 

Investments in infrastructure play an important role in the search for greater productivity.

The basic interest rate (Selic) is in a process of decline, given the expectations of falling inflation and the high degree of idleness in the economy. The continuation of the fall in interest rates over time will depend on advances that lead to a decrease in the structural interest rate of the economy, 

The emphasis should be on approving the structural changes capable of creating the conditions for improving the dynamics of the economy in the long term, as in the case of pension reform. Only then will we have sustainable economic growth, continuity of the fall in the structural interest rates of the economy and low and stable inflation.