Brazil's economic outlook dour without reforms, says former cenbank chief

Sept 2 (Reuters) – Brazil’s economic outlook appears bleak unless the government adopts structural reforms to build confidence in the country’s financial health, Arminio Fraga, a former governor of the central bank, said on Wednesday.

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

Brazil’s growth rate is “mediocre … and highly volatile,” said Fraga, who led Banco Central do Brasil from 1999 to 2002.

“It goes beyond the pandemic and short-term cycles,” he added.

The economy stalled more than expected in the second quarter, which could spur downgrades to estimates of 2021 gross domestic product (GDP).

Fraga said pressure on the fiscal spending cap would only increase if priorities were not changed, especially as “accounting gimmicks” were behind some current tussles.

He saw a tax bill now being considered by Brazil’s Congress and which proposes a tax rate of 20% on corporate profits and dividends, as one such vital reform.

Fraga, who is now co-CIO of Gavea Investimentos, believes other reforms, such as boosting spending on social security, subsidies and education could collectively raise Brazil’s annual growth rate to 4% or more.

As the central bank eyes a series of rate hikes to pull inflation within its 2022 target, Fraga saw the situation as being not fully under control.

That is a dynamic seen in the Brazilian real, Fraga said, which he believed is undervalued.

Brazil is among the emerging markets that could suffer as the U.S. Federal Reserve begins unwinding stimulus, but floating exchange rates and healthy financial markets should help cushion the blow, Fraga said.

“If (advanced economies’) real interest rates go into positive territory and commodities come down, Brazil will be hit, but that shouldn’t be enough to derail things completely,” he added. (This interview was conducted in the Reuters Global Markets Forum.)

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