Brazil has chance to consolidate in another level, former minister says

Brazil has a double opportunity for the coming years. The country can both consolidate itself at another level as an important commercial and international business partner in view of the reorganization of value chains and become a global reference in clean energy and decarbonization. This is the view of Joaquim Levy, a former Finance minister, now head of economic strategy and market relations at Safra. He spoke to Valor in New York during Brazil Summit 2022, an event held by Financial Times in partnership with Valor.

Mr. Levy said that one of the country’s advantages in a changing global environment — caused by the pandemic and sharpened by the war in Ukraine — is precisely the fact that Brazil is far from conflict areas, besides having a lower geopolitical risk profile.

“For many years, Brazil has built a reputation of stable democracy, of continuity with respect and convergence, and this is the most important thing for foreign investors,” Mr. Levy said. “Countries are reassessing their supply and value chains,” he added. “Brazil’s characteristics have great value [for international investors] if they are associated with the confidence of the predictability and transparency of the administration.”

In the economist’s view, “we have already seen some sign that foreigners are returning to look at Brazil in a different way [in view of the recent deterioration of the image abroad], if we signal in that direction.” According to Safra’s executive, “we are a country that can be trusted, that contains animosities and has predictability.”

In parallel, Brazil has a great opportunity in the fields of clean energy and carbon credit. “We have a tested and competitive biofuel power source that can be combined with an electric engine to deliver a huge productivity gain,” he said

According to the economist, Brazil would have great sectorial advantages, in addition to having production and employment growth, “with the electrification of the economy.” Mr. Levy says that he himself conducted a study, yet to be published, that supports this thesis.

The former minister reinforces that natural assets are another source of new income generation for the country. “Planting trees or just letting the forest come back is a carbon sequestration machine that has no parallel at the moment. Today there is nothing more efficient and cheaper than allowing the forest to regenerate. That captures 10 to 15 tonnes of carbon per hectare per year.”

Investment in renewable energy, in Mr. Levy’s view, helps to increase productivity in the economy. “Today, having renewable electricity is cheaper than other sources,” he said. “Wind and solar energy are much cheaper; it’s the cheapest power generation we have.”

This cost reduction, according to him, in itself generates an increase in productivity. “When we produce something cheaper, there’s more productivity, if you have a car that runs twice as much, there’s an increase in productivity, if you have a steel mill that doesn’t pay a surcharge due to the use of coal, there’s an increase in productivity,” he said.

According to Mr. Levy, “for a good period there will be an increase in total factor productivity.” This occurs because less cost and more funds for investments are reflected in more employment. “If unemployment has gone down, without affecting salaries, there is an increase in labor productivity. An example was the period between 2000 and 2010, when total factor productivity increased substantially because the country grew using resources it already had to a large extent without spending [more than it collects].”

The former minister also says that “no doubt Brazil can become a world reference in the use of low-cost clean energy.” To be so, he said, the country needs to organize and incorporate those priorities into its growth strategy. “If we do this, we can quickly become a reference and, in the carbon credit aspect, we can become an international supplier,” he said.

Mr. Levy defends that the government needs to have a clear plan on how it is going to face the big issues of the economy, such as stimulating the increase in productivity and fiscal balance. “When you have a plan, the money appears and the government doesn’t need to keep on spending, spending and spending,” he said. “The biggest difficulty in Brazil is the uncertainty about the direction in which the government is heading, and this makes financing difficult,” he added.

He believes that if foreign investors have clarity about the directions of the economy, more capital begins to enter the country and in a more sustainable way. “Establishing clear goals can bring more capital to Brazil, which reduces pressure on public spending,” he said. “This way, the government can use the money with more discipline, which allows domestic interest rates to fall.”