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

Insufficient government spending cuts, rising global interest rates and tighter liquidity place Brazil in a risky fiscal situation, a former governor of the central bank said on Tuesday.

Reform efforts including a new fiscal framework designed to limit escalating public debt and plans for tax reform are a welcome step in the right direction, but likely insufficient, said Arminio Fraga, who helmed 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.

(Reporting by Lisa Mattackal in Bengaluru and Divya Chowdhury in Mumbai; additional reporting by Marcela Ayres; Editing by Josie Kao)