Brazil changes tack with new stimulus plan
- 15 August 2012
- From the section Business
Brazil's government is set to launch the first in a series of measures that could inject up to $50bn (£32bn) into the economy over the next five years.
The first part of the plan, to be announced on Wednesday, includes privatising about 14,000 kilometres of railways and roads.
The privatisation of ports, lower energy costs and incentives for industry will soon follow.
The package is designed to boost what have been disappointing growth levels.
President Dilma Rousseff has invited 50 leading Brazilian businessmen to the capital Brasilia where she will personally launch the new strategy.
In May, she brought the businessmen to the presidential palace - the Planalto - to ask them what was needed to stimulate the economy.
Growth in Brazil is predicted to be under 2% this year, the weakest annual performance since 2009 and a sharp slowdown from an impressive 7.5% rise in 2010.
Rising debt rates
Prior to these measures, the government had been counting mainly on rising levels of domestic consumption - fuelled by credit growth and rising income among poor Brazilians - alongside investments by state companies.
Although the previous strategy had helped Brazil become the sixth largest economy in the world in 2011, overtaking Britain, the government has not been able to maintain high growth rates.
The recent weak growth has been attributed mainly to rising debt rates among the population and the global downturn, which reduced demand for Brazilian products.
Expensive energy, poor infrastructure and increasing labour costs - known here as 'Custo Brasil' or the 'Brazil Cost' - have also weighed on growth, analysts say.
Now the government will increase the role played by private investors, who were seen to have lost ground during the government of Luiz Inacio Lula da Silva, Brazil's president from 2003-2010.
President Rousseff was his chosen successor, but she is seen as a tough and pragmatic decision maker when it comes to economic policy.
In February, the government granted three of the largest airports in the country to private companies, hoping to improve overstretched facilities before the 2014 Football World Cup.
Now roads, railways, ports and perhaps other airports will also be privatised. President Rousseff hopes these concessions will also help to improve the country's much-criticised infrastructure.
"The government realized that privatisations are a way to boost investment", says Felipe Salto, an economist at Tendencias, a leading consulting firm in Brazil.
The concessions are expected to attract up to $50bn in investments in five years.
Rousseff is also preparing to lower the price of energy for industry with the abolition of some federal taxes, which could cut the price by 10%.
Further extensive reductions would depend on tough negotiations with governors and politicians across the country.
Economists are worried, however, about a new round of tax reductions for industry that should be announced in the coming weeks.
"Without structural changes, they could even generate demand and short-term growth, but also cause higher inflation", says Mr Salto.
The measures, he says, would also affect the fiscal balance.
"Comprehensive stimulus measures could harm the efforts to bring down public debt, leading to imbalance in government accounts."
For economist Silvia Matos, professor at Getulio Vargas Foundation, "the new package shows that the government is convinced that the economy faces a structural problem.
"The diagnosis is correct, but took too long to be made."
According to Ms Matos, previous economic steps taken by the government this year, such as reducing taxes on cars, were not enough to lift GDP.
Not even the recent devaluation of the currency, the real, and the progressive reduction in interest rates, have produced significant effects so far.
According to the National Confederation of Industry, 11 of the 19 industrial sectors they were tracking suffered a drop in capacity in 2011, indicating a cooling in industrial activity.
Ms Matos believes the new package will tackle some key economic problems, but says Brazil faces other serious issues such as increased public spending and an inefficient tax system.
Without reforms in these areas, she says, the country's economy will remain vulnerable.