Synthesis of the Brazilian Economy

BRAZIL ECONOMICS - Report 14 Jun 2016 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

The first month of the interim government of Michel Temer was marked by important victories, the most evident being the assembly of the economic team. The quality of the new team is unquestionable and extremely welcome. It includes people like Henrique Meirelles as finance minister, Ilan Goldfajn as Central Bank president, Pedro Parente as Petrobras CEO, Maria Silvia to head the BNDES, Eduardo Guardia as general secretary of finance, Mansueto Almeida to head the Secretariat of Economic Oversight, and Marcos Mendes as advisor to the Finance Minister. Other economists with solid academic backgrounds and experience with macroeconomic policy were called to head some departments of the Central Bank. The situation faced by the new team is critical, demanding technical skill and political adroitness to overcome it.

In Congress, two important measures aiming to repair the fiscal situation have been approved with room to spare: the new deficit target of R$ 170.5 billion for the year; and the untethering of 30% of revenues from obligatory expenditures until 2023 (the “expanded DRU”), though this is still pending Senate approval. The proposed constitutional amendment on the creation of public spending limits, to be sent to Congress, according to the government before the end of June, will be the next big test, but not the last, since it only will create a target to be met. In light of the complex set of mechanisms that straightjacket spending allocations, there will be a need for other constitutional amendments, all of them accompanied by high political costs (higher minimum age for retirement, rule on indexation of social benefits, etc.). The challenge is huge, but a good start has been made.

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