Brazil's President Seen Ducking Economic Reforms

Friday, 04 Mar 2011 01:30 PM

 

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Brazilian President Dilma Rousseff is backing away from a reform agenda that the business community, the IMF and others say is needed to spur investment and sustained growth in Latin America's largest economy.

Despite commanding a large majority in Brazil's Congress, Rousseff's center-left coalition government has been spooked by concerns about its spending, inflation and uncertainties in the global economy, according to its leaders.

That has led it to water down or delay legislation that would, among other things, simplify the unwieldy tax system, reform the oil royalty structure and tighten oversight of the country's massive mining industry.

Business leaders have said those changes would make it easier to operate in Brazil, where manufacturers and other companies frequently complain that the strong real currency, onerous red tape and high tax burden make it hard to compete.

"At this juncture, even with political stability, you could create financial instability" by attempting to pass the reforms, Candido Vaccarezza, government leader in the lower Chamber of Deputies, told Reuters.

"You undertake such changes when things are calm, not during an international economic crisis."

Rousseff, an economist who defeated a centrist challenger in a 2010 election, oversaw austerity measures opposed by unions and other key supporters of her Workers' Party (PT), raising hopes among business leaders of more reforms to come.

But she began distancing herself from the reform agenda before taking over from her predecessor, Luiz Inacio Lula da Silva, putting the brakes on overhauling costly pension benefits and rigid labor laws.

Now the government has watered down the planned tax overhaul, which Rousseff had highlighted as one of her top economic priorities, to a few targeted payroll and capital investment tax breaks.

The big task of harmonizing state taxes will be postponed.

Industry leaders have long complained that the current system favored imports over exports and penalized adding value to goods. States competing to offer the lowest tax for foreign goods, boost imports and hurt local industries, they say.

Rousseff's defenders, once again, cite timing as the main reason for the move.

"It's not worth tackling that because it requires agreement we don't have," Humberto Costa, Senate leader for Rousseff's ruling Workers' Party, told Reuters.

"There are a lot of interests involved. It's not so easy."

OIL, MINING LEGISLATION

A bill that would define the distribution of oil royalties between Brazil's states also is unlikely to be discussed until the second half of the year, preventing the government from auctioning rights to explore vast, offshore oil reserves.

Investors were eagerly awaiting the legislation, especially as the recent rise in global oil prices had made Brazil's offshore oil deposits more attractive to multinationals seeking to boost their reserves.

"We don't know how to deal with that issue yet. I don't see us voting on it for at least three to four months," Vaccarezza said.

Framework legislation that would heighten government control and tighten concession rights in the mining industry, a mainstay of the booming economy, may be sent to Congress by mid-year. But debate over a possible mining royalty hike is held up and will continue to generate uncertainty for investors.

"The government's attitude is worrying, this could be a lost opportunity," said Rogerio Cesar de Souza with Iedi, an industry-financed think tank in Sao Paulo.

Pressure on Rousseff's government is likely to increase, as Brazil's economy slows following breakneck expansion in 2010.

Dominique Strauss-Kahn, head of the International Monetary Fund, joined the chorus of voices calling for the country to keep to its reform agenda on a visit to Brazil on Thursday, saying it would help ensure sustainable economic growth.

But with the economy at its strongest level in decades, some in the federal government say that the prevailing philosophy is not to rock the boat with potential battles in Congress.

"This is a minimalist government. It doesn't believe in big reforms or creating much noise and controversy in the short-run," said Andre Pereira Cesar, a congressional expert at Brasilia-based consultancy CAC.

© 2014 Thomson/Reuters. All rights reserved.

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