With standing room only for the speech of Finance Minister Joaquim Levy, who stressed government’s commitment to ensuring fiscal stability amid what he called a “period of economic adjustment” as Brazil copes with a “temporary” economic slowdown. Acknowledging Brazil’s need to address its debt burden and contain inflation, he nonetheless pitched to the assembled investors to invest in Brazil’s huge infrastructure program.
Comparing emerging markets, India came off favourably versus Brazil, with panellists endorsing the Modi government’s reform programme as far outstripping that of the Rousseff administration, despite Finance Minister Levy’s commitment to fiscal discipline at the start of the day. However, differences aside, panellists noted the significant increase in demand for currency hedging for emerging market currencies such as BRL, INR and CNY, particularly in relation to ETF exposure in these currencies. With further volatility expected, demand for hedging of currency risk via the offshore NDF market is likely to grow.
Many discussants regarded recent rallies across the emerging markets as driven by US liquidity not economic fundamentals; while Brazil and its peers are well prepared for a Fed rate hike, the effect on Brazil’s domestic economy will be challenging in spite of relatively high interest rates set by the central bank.
Several panellists argued Finance Minister Levy’s new economic policy is too limited to address major structural issues such as labour market dynamics, questioned the assertion that inflation will fall back to 5%, and regarded Levy’s fiscal policy as simply pushing expenditures and the task of controlling inflation into 2016. Major reforms might well have to wait for the next government, diminishing Brazil’s short term growth prospects, while depreciation is likely, with a major impact on the carry trade and the large stock of debt maturing this year. Uncertain Chinese growth prospects also present a major challenge to Brazil, which depends heavily on China for exports.