EMTA Forum in São Paulo - April 26

EMTA FORUM IN SÃO PAULO
Tuesday, April 26, 2016 

Sponsored by 

4:15 p.m. Panel Discussion 

"Challenges Facing Brazil 2016"
What policy and political initiatives are needed to reverse the direction of Brazil’s most challenging economic and political environment in many years, and what toolkit do investors need to navigate the rocky road ahead?     

Zeina Latif (XP Investimentos) - Moderator
Mario Mesquita (Brasil Plural)
Peter Shaw (Fitch Ratings)
Alexandre Schwartsman (Schwartsman & Associados)
Adauto Lima (Western Asset)

5:15 p.m. Cocktail Reception 

Additional Support Provided by Fitch Ratings and XP Securities LLC. 

Complimentary for EMTA Members / US$695 for Non-Members. 

Registration for this event is now closed. We look forward to seeing you at a future EMTA event. 

Sao Paulo Forum Addresses Political Transition in Brazil

The impending impeachment of Brazilian President Rousseff was like an airplane crash that wasn’t due to a single pilot error, but instead a result of a series of bad decisions and errors that, combined, produced a disaster, according to noted political analyst Murilllo de Aragao. De Aragao analyzed the fall of President Rousseff in his keynote speech at EMTA’s Forum in Sao Paulo, Brazil on Tuesday, April 26, 2016.

In his discussion, De Aragao described the series of steps that had ultimately led to the president’s expected ouster. “She lost control of her administration; she didn’t pay attention to the dialogue that had existed under President Lula with Brazilian society; she lost the support of labor unions; she lost credibility with the financial markets.” By the time the president realized some of her mistakes, it was too late, and her attempts to save her government were in vain. De Aragao admitted he had never doubted that she would be impeached, and that “only an extraordinary event could reverse the present course, despite the administration’s trying to buy more time.”

Speculating on a potential Temer administration, De Aragao stated that first, the new president must forge a coalition in Brazil’s splintered Congress. “Dilma had the support on paper, but she didn’t know how to use it…Temer does,” he said. The new president must also put together a strong economic team. He must also be prepared for a backlash from both Dilma and former President Lula. And the lavajato scandal still remains a cloud over the new administration, De Aragao added.

The actions that a president Temer would take to revive the economy would “mostly hurt civil servants; that is where the job cuts will be made.” In addition, the number of government ministries would be cut. However Temer would avoid a large devaluation of the BRL which would antagonize the middle class and would not adopt the CPMF banking tax.

A window of 18 months was likely open for Temer to make reform progress (before House members go into election mode). Brazil would be boosted by Central Bank autonomy, and even what De Aragao called “the worst make up in the House in 30 years” would be prepared for “new measures without anesthetics.”

De Aragao predicted that May, June and possibly July would be turbulent months in the country. “We will fluctuate between euphoria and depression.” Despite expected volatility, De Aragao remained optimistic long-term, with the financial markets “the country’s greatest driver…which will lead Brazil to modernity.”

The Forum also featured a panel discussion moderated by Zeina Latif (XP Investimentos). “There is broad consensus that the impeachment of the president is not the solution for the economic crisis, because at the root of it is the fiscal issue,” she stated. Latif asked speakers for their views on whether a new administration would be able to bring growth back in line with Brazil’s potential, and if inflation could be tamed.

Mario Mesquita (Brasil Plural) believed the odds were “greater than 50 percent” that a new government would be able to reverse the decline in growth and reduce inflation. Price adjustments on gas and power were all enacted last year, and there was consensus that fiscal policy must be addressed. “Politicians are disagreeing less than in the past on raising taxes, so I am optimistic that some—not all—reforms could be passed.”
Fitch Ratings’ Peter Shaw reminded attendees that his agency retains a negative outlook on Brazil’s rating. “We see a consensus both on the root causes of the current mess, and consensus on what steps should be taken, but what is less clear is the political ability to implement those measures; we must see it to believe it,” he stressed. In Shaw’s view, the crystal ball was cloudier than ever before, and it was very unclear when growth could resume.

A more pessimistic note was sounded by former Central Bank official Alexandre Schwartsman (Schwartsman & Associados). “There is no room to increase taxes; and if we could cut spending by some sort of magic, we would,” he stated. In his view, “what we must do is change the rules of the game…there are far too many agents today but constitutional reform is unlikely.” Schwartsman feared that “we couldn’t have a worse administration than we have today, but I don’t see how we can get on a better track; we risk making the same mistake when [former Finance Minister] Levy had the job, and we were only able to do one-third of the fiscal adjustment that was needed.” Summarizing, he added “we will have a new president, but not a new society.”

Western Asset Management’s Adauto Lima provided an additional pessimistic view. He believed that Brazilians were “not ready to discuss the recession that has gone on for years.” While there had been much ado about Brazil’s rise as a nation and an economy a decade ago, “we later saw that there was no maturity.”

The failure to achieve the inflation target rate served as proof of Brazil’s under-development, in Mesquita’s view. Overdue Central Bank independence will help but will not in itself solve every problem, and it should work harder to bring inflation down to target levels. Schwartsman noted that many of the candidates rumored to be under consideration for Central Bank roles had long histories of fighting inflation, and they probably could reverse the erosion on the Bank’s credibility. In addition, the Central Bank could do better in its communication to the market, he argued, although its greatest achievement would be to deliver inflation at the target level.

The panel also addressed Brazil’s corporate sector, Central Bank intervention in the FX market, and prospects for Brazil’s equity market. The Forum was sponsored by MarketAxess, with the additional support of Fitch Ratings and XP Investimentos. Approximately 100 market participants attended.