Experts say country needs to devise a healthy business environment to attract capital

04/09/2024

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Dario Durigan — Foto: Ana Paula Paiva/Valor

Experts at the Rumos 2024 event, hosted by Valor at the Rosewood Hotel in São Paulo, said that for Brazil to achieve growth and improvement, it must focus on three key pillars: fiscal adjustment, private investment, and the inclusion and sustainability agenda. According to economists, government officials, and private-sector representatives, the country has already made progress, such as approving the tax reform. Still, it needs to create a healthy business environment to attract domestic and foreign private capital.

For example, the uncontrolled increase in public spending is often cited as a cause for concern among investors. During the event, the executive secretary of the Ministry of Finance, Dario Durigan, acknowledged that actions to reduce and improve the quality of public spending were necessary. “Seeking to reduce expenses is important for the economic team,” he said.

The ministry’s number two justified the beginning of the tax adjustment on the revenue side due to “distortions” caused by the granting of benefits, exemptions, and other devices that reduced collection without bringing structural economic gains. “With the spending cap [the rule that limited growth in public spending to the previous year’s inflation, replaced by the tax framework], there was a lock on expenses, but there was no lock on the revenue side,” he said. “The special regimes, presumed credits, [tax] advantages, and loopholes were sometimes reproduced even by municipalities.”

The government “has been recomposing the tax base by attacking the most serious inefficient gaps.” In the short term, Mr. Durigan acknowledged that, alongside adjustments, the government is counting on dividends from state-run companies to aid in the rebalancing of government accounts. “The Finance Ministry’s view is that the [dividend] inflows are relevant from a fiscal point of view, but this should happen with the appropriate dialogue.” According to Mr. Durigan, “[Finance] Minister Fernando Haddad does not deny and I do not deny that it is important to have these revenues.”

In the long term, the secretary believes that fiscal adjustment will be achieved through the tax reform itself. “Fiscal consolidation was set in motion last year and we now see good results at the beginning of 2024. However, it is an agenda that over time will be fulfilled by tax reform, which will bring about the most comprehensive reorganization of our tax system.”

During another panel, Marcos Barbosa Pinto, the secretary of economic reforms at the Ministry of Finance, discussed a series of measures spearheaded by the ministry. These are initiatives to reduce the net interest rate spread (the difference between the funding rate and the banks’ lending rate). The secretary referenced a study conducted by the Central Bank, which indicates that if Brazil had a spread equivalent to the global average of 6% per year, it would experience a 40% increase in credit availability and a 5% rise in GDP.

“In the long term, we have an important goal,” he said. Brazil has a spread of around 20% per year. “We can reduce it,” said the secretary. “Brazil has the conditions to unlock a gigantic credit volume and very large growth.”

Mr. Durigan added that the economic team has been working with a dual agenda on a long-term development vision: fiscal and ecological consolidation. “To achieve growth alongside social development and environmental responsibility, we need two distinct agendas,” he said. The executive secretary said that “these issues complement each other.”

Solutions to increase productivity in Brazil were also issues of debate at Rumos. Mr. Barbosa Pinto said, “Brazil will not be able to grow sustainably without attacking the problem of productivity.”

He viewed this as “long-term and challenging work,” but he said that significant changes could be observed in the short term through measures implemented in the recent past, such as the fiduciary alienation law, which significantly expanded the real estate credit market. Mr. Barbosa Pinto mentioned the approval of the new guarantee framework last year, which is expected to decrease financing costs and speed up the recovery of assets pledged as collateral in contracts.

Economists Silvia Matos, coordinator of the Macro Bulletin at the Brazilian Institute of Economics (FGV Ibre), and Cassiana Fernandez, head of economic research for Latin America and chief economist for Brazil at J.P. Morgan, suggested that the structural reforms could potentially have positive effects on productivity. “Something that surprised us was the positive effects of the labor reform,” said Ms. Matos. “The post-pandemic recovery was different. It came specially with formal employment.”

According to Ms. Fernandez of J.P. Morgan, the bank’s models also point to a potential growth of Brazil closer to 1.5% per year. The economist said she had “great confidence” in the effects that consumer spending tax reform could have on productivity going forward.

Santander’s chief economist and former Treasury secretary Ana Paula Vescovi assessed the need to reduce credit costs in Brazil to accelerate growth. “It is necessary to reduce the cost of finances and make room for the private sector to play its role,” she said.

Ms. Vescovi emphasized the importance of the country being able to devise “a healthy business environment with legal certainty.” The economist said she often talks with international investors “who look at Brazil and see the comparative advantages we have at this time of energy transition.” However, issues such as the governance of state-run companies and the tax reform process itself, which still needs to be regulated by Congress, end up inspiring caution.

*Por Anaïs Fernandes, Marcelo Osakabe, Sérgio Tauhata, Taís Hirata — São Paulo

Source: Valor International

https://valorinternational.globo.com