"Ethical and political crisis may push economic recovery for 2018"


In a lecture for ETCO advisers, economist Samuel Pessôa talks about the domestic situation and the influences of China, Europe and the United States for Brazil


The economist Samuel Pessôa, head of the Economic Growth Center of the Brazilian Institute of Economics (IBRE / FGV), was one of the speakers at the meeting of the Advisory Council of ETCO-Brazilian Institute of Ethical Competition, on November 27, in Rio. He spoke about the domestic situation, the global economy and the prospects for Brazil in the coming years.

Pessôa is a graduate professor in economics at Fundação Getulio Vargas in Rio de Janeiro (EPGE / FGV) and a columnist for the newspaper FSP. After the meeting, he talked to ETCO in Action. Check out the main parts of the interview.

ETCO - What is the origin of the challenging economic scenario faced by the country today?

Samuel Pessôa - The current crisis has an ancient origin. The process of continuous increase in Union spending, since the 90s, does not correspond to the reality of the country and should have already been reviewed. For many years, the increase in public spending has exceeded the growth of GDP (Gross Domestic Product) and this has always been financed by the exorbitant increase in the country's revenues. Until 2008, this model of increased public spending was sustained and the country had a surplus of 3,5 , 2010%. However, in mid-2014, revenue growth began to decline, but spending continued to grow exponentially. In 0,6, we already had a deficit of 1% and this year the index should rise to 2014%. Due to the structural problem in the country, which spends more than it collects, there was an investment stampede. Since the first quarter of XNUMX, investments in Brazil began to decline and the trend is that, at least until the third quarter of next year, this continues to happen. Hence the challenging scenario we are experiencing.

ETCO - Did the political problems observed in the country help to worsen the economic scenario?

Samuel Pessôa - Public spending grows steeply and economic growth is low. Finance Minister Joaquim Levy signaled the necessary adjustments to change the economic scenario, but it was clear that he will not be able to put the measures into practice due to political problems. This generated a breach of investor confidence and Brazil's rating was downgraded. One of the world's largest risk agencies no longer indicates Brazil as a safe place to invest and the others are expected to do the same soon. So, yes, political problems and party imbroglios mean that the necessary measures are not taken and the situation remains static. The Central Bank is unable to lower interest rates, inflation rises and investors lose confidence. We are in a swamp.

ETCO - What can be done to make the economy signal a recovery?

Samuel Pessôa - The recipe is not simple and will not please everyone. But we are talking about the need for new sources of revenue, that is, more taxes. In addition, we need structural reforms, as in Social Security, so that fixed expenses are reduced.

ETCO - Should these changes happen in the short term? When should the scenario be more favorable?

Samuel Pessôa - We run into the political issue again. The problems are not umbilical to President Dilma Rousseff, however they are personified and the base of her government has no strength to approve the necessary measures. The ethical and political crisis is getting in the way and this is delaying recovery. Perhaps the real changes will only happen in a new government, either in 2018, as new elections, or before, if there is greater wear and tear and the president does not reach the end of the term. It is important to emphasize that it is not just the president, but the reform in the parliamentary base so that the changes are implemented. In the meantime, we will experience more unemployment, higher inflation and an increasingly high deficit in primary accounts.

ETCO - How can the economic situation in the United States affect the Brazilian market?

Samuel Pessôa - The United States is ending the cycle of its worst economic phase. The growth of the GDP, of 2,2%, shows that the country is taking advantage of its potential and indices such as the recurring fall in unemployment prove that the worst for them has passed. Their inflation is low and the interest rate of the Federal Reserve (American central bank) is close to zero. Their stability is positive for Brazil, since they are large importers and help to mitigate the losses of the local industry, especially with the appreciation of the American currency against the real. However, there is a sign for us to be alert, which is the possible increase in their interest rate starting in 2016. This process can withdraw investment from Brazil and this can pressure our exchange rate and inflation.

ETCO - How can the situation of the European economy affect business in Brazil?

Samuel Pessôa - Europe has a more neutral stake in our economy compared to the United States. After 2009, the European periphery, which includes Portugal, Spain, Ireland and Greece, was unable to get rid of fiscal problems and ended up preventing a better potential in the region. Even so, Europe grows an average of 1,5% per year and everything suggests that it will be able to stabilize. Although quite incipient, it is already possible to see a small drop in unemployment in the region. For Brazil, the reestablishment of the region is positive, as it precludes the possibility of a sudden commercial disruption.

ETCO - And how does China's slowdown affect our economic scenario?

Samuel Pessôa - I have an optimistic outlook on China, although growth has slowed. I don't think the numbers are catastrophic, on the contrary, we are talking about an average growth of 5,5% or 6% per year, while the population increases by 0,5% per year. In other words, per capita income growth still exceeds 5% per year and far exceeds the United States, where this rate is around 1%. There is still Chinese demand for our commodities and that will be guaranteed for a long time.