Publish in Analysis - Wednesday, April 19, 2017
INFLATION SLAYERS Finance Minister Henrique Meirelles and Central Bank President Ilan Goldfajn. (Photo: Brazil Central Bank)
Brazil inflation lowest in a decade amidst tighter fiscal policies.
BY JOACHIM BAMRUD
Brazil is finally winning its fight against inflation after years of missed targets. The new government of President Michel Temer and his economic team – including finance minister Henrique Meirelles and central bank chief Ilan Goldfajn – have been able to tame the cost of living increases in Latin America’s largest economy.
This year, Bazil will likely have an inflation rate of 4.4 percent, the lowest rate since 2007, according to a Latinvex analysis of new projections from the International Monetary Fund (IMF). That would mean that Brazil will have lower inflation than Mexico and Colombia – traditionally two low-inflation countries that have seen their rate grow recently.
Last year saw a small improvement as well – with Brazil’s inflation rate falling to 8.7 percent from 9 percent in 2015. The 2015 rate was the highest since 2003.
During his confirmation hearing in June last year, Goldfajn said a low inflation was key to foster investment and recover the economy, which at the time was mired in its worst recession ever.
Former president Dilma Rousseff and her economic team – including her finance ministers Guido Mantega (strongly disliked by investors) and Joaquim Levy (finance minister for a little over a year) and central bank chief Alexandre Tombini repeatedly missed inflation targets. Although both Levy and Tombini were well respected by economists, they were unable to rein in inflation amidst over-spending by Rousseff.
During Rousseff, the central bank’s weekly polls of economists routinely saw upward revisions of inflation estimates. This year, the trend has been the opposite, with economists revising down their inflation estimates.
Temer became Brazil’s president in May last year when Rousseff was ousted over budget violations and will serve the rest of her term, which ends in January 2019. He has implemented business-friendly policies that stand in sharp contrast to Rousseff’s populist economic policies.
Unlike the Mantega-Tombini relationship, Meirelles and Goldfajn were known to work together well before their latest appointments last year. Goldfajn worked at the central bank when Meirelles was its governor. At the time Meirelles was widely credited with avoiding a surge in inflation after leftist politician Luiz Inacio Lula da Silva became president in 2003 and rattled markets. Unlike Rousseff, Lula gave the central bank and Meirelles full autonomy during his two terms, even when Mantega started clashing with Meirelles after being named Brazil’s finance minister in 2006. So well-respected is Meirelles that Lula allegedly pressured Rousseff to consider naming him as finance minister.
However, not all is smooth sailing. Meirelles’ attempts to improve fiscal accounts is facing opposition.
His plans to reform the pension system led to violent protests by police unions on Tuesday. Congressional police in riot gear used tear gas to drive back hundreds of members of federal police unions who tried to invade the Brazilian Congress to protest against the reform, The Guardian reported.
Pension reform is seen as key to improving Brazil’s finances. The country has one of the world's most generous social security systems and an average retirement age of 54 and changes will reduce government savings from the reform by 20 percent to 25 percent in the next 10 years, and by nearly 30 percent over a 30-year horizon, Meirelles told Reuters in an interview.
Meanwhile, Meirelles expects to present a tax reform proposal in the second half of 2017 and approve it in Congress before the end of the year. Brazil has Latin America’s worst tax climate, according to Latinvex data.
PROBLEMS IN ARGENTINA
Brazil’s inflation success also compares favorably with neighboring Argentina, which has seen slow progress.
Goldfajn's Argentine colleague, Federico Sturzenegger, is pursuing an aggressive anti-inflation strategy which at times has put him at odds with other members of the government of Argentine President Mauricio’s Macri.
Sturzenegger repeatedly clashed with Alfonso Prat-Gay, who was Macri’s finance minister until he was fired in December last year.
The IMF estimates Argentina will see inflation of 25.6 percent this year, which is much higher than Sturzenegger’s target of 12 to 17 percent. Last year, the rate reached 30 percent.
Except for economic basket case Venezuela, Argentina is the only country in Latin America with double-digit inflation.
Noted currency expert Steve Hanke -- a professor of applied economics at Johns Hopkins University -- has advised that Argentina can dramatically reduce its inflation if it dollarizes.
“If Argentina would dump the peso and adopt the greenback, inflation would end immediately,” he tells Latinvex.
Historical data bears him out. Ecuador, which has suffered from a leftist-populist government since 2007, has managed to keep inflation among the lowest in Latin America thanks to dollarizing its economy in 2000.
Inflation fell from 96 percent in 2000 to 38 percent in 2001 and reached single digits in 2003.
This year, Ecuador will likely see a rate of only 0.3 percent, according to the IMF. That will be the lowest in Latin America, according to Latinvex. This despite the fiscally expansive policies of outgoing president Rafael Correa.
Meanwhile, Latin America’s two other dollarized economies – El Salvador and Panama -- will likely have the region’s second- and fourth-lowest inflation rates this year.
The average for Latin America will likely be 4.2 percent, according to the IMF. The region’s largest economies will all see relatively low rates: Mexico (4.8 percent), Colombia (4.5), Chile (2.8 percent) and Peru (3.1 percent).
For Mexico, the rate marks a strong increase compared with last year’s rate of 2.8 percent, but is in line with the traditional average. Meanwhile, Colombia’s estimated 2017 rate marks a clear improvement from last year’s rate of 7.5 percent – the highest rate since 2001.
Venezuela will likely end up an inflation of 720 percent this year, nearly three times higher than the 254 percent rate last year, the IMF estimates. That will be the second-highest in the world, ahead of war-ridden South Sudan at 143 percent, according to a Latinvex analysis.
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