Brazil’s economic prospects are grim without reforms, says Arminio Fraga

(Reuters) – Brazil’s economic prospects look bleak unless the government adopts structural reforms to boost confidence in the country’s financial health, former central bank president Arminio Fraga said on Wednesday.

A growing fiscal deficit, lack of inclusive and sustainable growth and political unrest, along with the lasting impact of the 2014 recession, weigh on expansion and investment, Fraga told the Reuters Global Markets Forum.

Brazil’s growth rate is “mediocre…and highly volatile,” said Fraga, who ran the BC from 1999 to 2002. “It goes beyond the pandemic and short-term cycles.”

Weak performances in industry and agriculture overshadowed the strength of services and the Brazilian economy registered a slight decline in the second quarter of this year, losing strength compared to the beginning of 2021 and stabilizing after three consecutive quarters of growth.

Fraga said the pressure on the spending ceiling will only increase if priorities are not changed, especially amid “accounting gimmicks”.

Read also: Economists see risks accumulating after disappointing Q2 GDP and revise projections for activity

He considers the proposal to change Income Tax rules, whose main text was approved by the Chamber of Deputies on Wednesday, a vital reform.

Fraga, founding partner of Gávea Investimentos, believes that other reforms, such as increased spending on social security, subsidies and education, could collectively raise Brazil’s annual growth rate to 4% or more.

At the moment when the BC raises interest rates to contain inflation, Fraga believes that the situation is not fully under control.

This is a dynamic seen in reality, according to Fraga, which he believes is undervalued.

Brazil is among the emerging markets that could suffer from the start of the Federal Reserve’s stimulus cuts, but the floating exchange rate and healthy financial markets should help alleviate the blow, Fraga said.

“If real interest rates (in advanced economies) enter positive territory and commodities fall, Brazil will be hit. But that shouldn’t be enough to mess things up completely,” he added.

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