| Edited by Richard Lapper, Latin America editor |
Brazil's fiscal anxieties
President Luiz Inácio Lula da Silva has begun his second term in office with a firm declaration against populism. Even so, as the economic team prepares it plans to attack the problem identified by the president as Brazil's most pressing - its low rate of growth, market analysts are still wondering what to expect in fiscal terms from the new administration.
In this respect, the first mandate was not encouraging. Apart from an early attempt at pensions reform in 2003 (part of which has yet to pass into law), the outgoing government has done little to tackle some of the most difficult issues, such as Brazil's crippling tax burden. Recent developments - such as the increase in the national minimum monthly wage announced from R$350 to R$380 - confirm that the recent trend for increases in current spending will continue.
Worryingly, Luis Marinho, labour minister, announced the wage package as a victory over the "orthodox" ministers in the economics team - Paulo Bernardo, planning minister, and Guido Mantega, finance minister. The two ministers, who had advocated an increase to R$367, were not even consulted.
Admittedly, the extra cost - about R$2bn, or nearly 0.1 per cent of GDP, to 2007 expenditure - is not unmanageable but it is a move in the wrong direction. More recently, the decision by Carlos Kawall, the treasury secretary and a known fiscal hawk, to resign shortly after Christmas will do little to calm concerns on Wall Street, even though Mr Kawall has denied there were any divisions between him and his boss (Mr Mantega) and has stressed that he left for personal reasons
In any event, it is something that credit rating agencies - who seem certain to elevate Brazil to investment grade at some point in 2007 - should keep a close eye on.
Nobody could question the improvement in Brazil's balance of payments in recent years. The country is heading for a trade surplus of $45bn in 2006 and a current account surplus of nearly $13bn.
As Lisa Schineller of Standard & Poor's noted recently: "Brazil's external indebtedness, net of liquid assets, is projected at 51 per cent of current account receipts in 2006 and 43 per cent in 2007, down from 75 per cent in 2005 and one-fifth the levels of 2000-2002." But then if a country's ability to pay its debts is all that matters Brazil should already have an investment grade rating.
Mr Lula da Silva has still to prove, however, that he has the political will to come to terms with Brazil's fiscal problems, and on that front at least, the country remains way short of the mark.
Notes by Richard Lapper, Jonathan Wheatley and Hal Weitzman