The King is Dead, Long Live the King!
Executive Summary
If the nomination, widely indicated in the press, of Joaquim Levy to be the new finance minister turns out to be true, the above proclamation will certainly apply. He’s an economist with a solid academic background and extensive experience in public service, both as treasury secretary during the Lula government and secretary of finance for the state of Rio de Janeiro. He will have an arduous task ahead, especially to obtain political support and lead the new economic team.
The most important task on the agenda is in the fiscal policy field. To put the gross debt back on a path to reduce the ratio with GDP will require an adjustment of the primary surplus of almost 3 percentage points. In the past, the greatest adjustment was executed during the transition from the FHC to the Lula administrations, when the increase was just 1 percentage point. The adjustment needed now will have to be carried out gradually, involving spending cuts and unescapable tax increases. But in the short run, the effect will be to decelerate economic growth even more (and growth has been near zero). The costs will appear well before the benefits, which will require persistence and strong political support.
There are two other important tasks in store for the new economic team. One involves the exchange rate. An overvalued exchange rate is not the only culprit for the poor performance of industrial output and exports, but it’s one of the causes. The government will have to overcome the fear-of-float syndrome, allowing the real exchange rate to adjust and resisting the temptation to act to strengthen it to help control inflation.
The other job is to control inflation. Fiscal control will help the Central Bank in this job, but the government will have to abandon the actions on prices and the temptation to try to influence the exchange rate. In counterpart, the Central Bank will have to have more freedom to use the monetary instrument – the interest rate – to fight inflation, to assure that the depreciation of the nominal exchange rate reaches the relative prices between tradables and non-tradables.
Joaquim Levy is competent and has all the qualities to be an excellent finance minister. But he will need the personal support of the President, and for this to happen she will have to adjust her world view.
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