| 29 February 2024, Thursday |

Government spending, macro headwinds threaten Brazil’s economy: ex-central bank chief Fraga

Brazil is in a perilous fiscal situation due to insufficient government spending cuts, rising global interest rates, and tighter liquidity, according to a former central bank governor on Tuesday.

Reform measures, such as a new fiscal framework aimed at limiting increasing public debt and tax reform plans, are a welcome step in the right direction, but are likely insufficient, according to Arminio Fraga, former president of Banco Central do Brasil (BCB) from 1999 to 2002.

“I think it would be imprudent to count on ‘blue skies and good weather’ going forward, sadly, we’re not in a position to relax,” Fraga told the Reuters Global Markets Forum (GMF).

He said the government was not even considering classic expenditure cuts, as it also faces hurdles passing reforms through Congress.

“This leaves a fragile fiscal situation, in my view, into the distant future,” Fraga said.

As the world’s biggest central banks signal ‘higher for longer’ interest rates, Fraga noted the tightening supply of available capital has historically darkened the outlook for emerging market investments and growth.

Brazil’s central bank, meanwhile, cut interest rates in August by 50 basis points to 13.25%, and policymakers have signaled a similar pace of easing in subsequent meetings.

Despite August’s rate cut being more aggressive than most expected, Fraga noted the bank remains understandably cautious and will need to gauge the impact of lower rates on a meeting-by-meeting basis.

He does not expect a favorable foreign investment backdrop for Brazil even as investors shift away from China, given that existing fiscal reforms may already be priced in.

  • Reuters