BRASILIA, (Reuters) – Brazil’s incoming economic policy team surprised financial markets by promising deep cuts to budget spending yesterday, moving to shore up the main weakness in the country’s booming economy.
In his first public statements since President-elect Dilma Rousseff confirmed he would stay in his post, Finance Minister Guido Mantega said a recent burst in spending was no longer necessary since the global financial crisis had eased.
“Now is the time to reduce the government’s spending,” Mantega said at a news conference in the capital. “It’s necessary to make an effort so that … the country’s sustainable growth can continue.”
Mantega later told Reuters that the budget cuts could surpass 20 billion reais ($11.6 billion) in 2011, saying that Rousseff had asked for a “heavy hand” to rein in spending, which soared in the run-up to October’s presidential election.
“This fiscal agenda is not short-term. It’s a long-term philosophy,” Mantega said at the Reuters Brazil Investment Summit in Brasilia.
The explicit recognition of Brazil’s recent fiscal slippage — which has placed upward pressure on interest rates and, by extension, the Brazilian currency — capped a largely positive day for markets that included the nomination of Alexandre Tombini, a well-regarded technocrat, to head the central bank.
A formal statement confirming their appointments was accompanied by a pledge from Rousseff, who will take office on Jan. 1, to maintain the prudent economic policies that have made Brazil one of the world’s hottest emerging markets under current President Luiz Inacio Lula da Silva.
The message of fiscal restraint came with assurances that the central bank would remain independent to set monetary policy without political interference. That went over well with markets, helping to push up stocks in Sao Paulo to a session high on a day when yields on interest-rate futures fell on optimism about the new economic team.
Still, investors will be keeping close tabs to see if Rousseff’s top policymakers live up to their promises.
“At the rhetorical level, that’s what the market wants to hear,” said Alberto Ramos, senior economist at Goldman Sachs in New York.
“(Mantega) can talk the talk now, but he has to walk the walk. Those are very nice statements, but the recent measures that we have seen do not necessarily go in that direction.”
Tombini, who first joined the central bank since 1995 and is currently in charge of financial regulation, immediately addressed investors’ main concern — that Rousseff might rein in the bank’s de facto autonomy and pressure him to achieve her professed goal of lowering interest rates.
