BRASILIA (Reuters) – Brazil is at an “inflection point” where less public spending rather than more will deliver stronger economic growth, central bank president Roberto Campos Neto said on Monday, warning that fiscal concerns are harming financial conditions and investment.
Economy Minister Paulo Guedes also said on Monday that “transitory” spending must not morph into “inexcusable” permanent spending in coming years, adding that the economy is likely to shrink by a smaller-than-expected 4% this year.
In an online event hosted by the Milken Institute, Campos Neto said Brazil is being penalized by financial markets for the uncertain fiscal outlook following unprecedented spending this year to cushion the economic impact of the COVID-19 pandemic.
“We are at an inflection point right now that if we spend more money, the cost in credibility coming from the fiscal side is far bigger than the benefit of the spending itself,” Campos Neto said.
“If you want to induce growth, it is better to spend less than to spend more because we are getting penalized by markets,” he said, referring to the widening gap in recent months between short- and long-term market interest rates.
This “steepening” of the curve reflects investor unease over the government’s ability or willingness to rein in its record debt and deficit, and according to Campos Neto, is holding back private sector investment.
The central bank has lowered its benchmark Selic rate to a record low 2.00%. Campos Neto said future decisions will depend on economic conditions, but said credibility in the bank’s policy is crucial to flattening the curve and spurring investment.
“It is important to have credibility so that whatever we do with the Selic has a transmission channel that feeds into the long end of rates so that (investment) projects can be done with private money,” he said.
For his part, Guedes said the recovery from the worst of the pandemic shows that the economy will shrink by 4% this year, which would be less than the government’s official forecast of a decline of 4.7%.
Addressing the “2020 U.S.-Brazil Connect Summit” online hosted by the U.S. Chamber of Commerce, he said fiscal discipline will resume next year and that the government’s “spending cap” limiting public expenditure growth to the rate of inflation will be kept intact.
It will be a “big struggle”, however, he warned.
(Reporting by Jamie McGeever; Editing by Marguerita Choy)