World leaders routinely bog themselves down in the legislative mundane, promoting small social programs or new economic incentives for minute “Us vs. Them” political gains. However, neither Dilma Rousseff nor Alexandre Tombini are interested in petty politics, and as their terms begin, they're ready to get things done.v
Rousseff's Fast Start
BRIC relations, as we have seen, are generally relatively cozy. Each country knows their role in the new economic powerhouse, and each are usually “polite” enough to keep the serious public discussion to a minimum. However, this is not the case for the newly elected president Rousseff. No, Rousseff wants a serious talk about China's currency advantage.
Rousseff believes, as do many, that an artificially low Renminbi is hurting Brazil's exports to China. Such artificially low currency values mean an unbalanced trade benefit, one that has propelled China's foreign currency reserves to become the fastest growing stockpile in the world.
However, she's not stopping at China, either. Her new proposals call for a cut in spending and a cut to inflation, two actions which are generally considered to be recession creating. Rousseff, however, sees opportunity in shrinking government and controlling monetary policy, allowing for Chinese-Brazil discussions to make waves in the currency markets. A new budget and central bank president will cool otherwise crippling inflation.
Alexandre Tombini's Mission Impossible
Alexandre Tombini is the new president of Banco Central do Brasil, otherwise the Bank of Brazil, or more commonly, Brazil's central bank. Early indicators suggest Tombini is out for blood, hoping new central bank goals will help reduce internal inflation and keep Brazil on a path for growth.
The first goal is to aim lower, one that should be easily achieved. While annualized inflation of 4.5% is the bull's eye for the government, Tombini wants to go lower, shooting for a target of roughly 2% plus or minus 2% fluctuations. Such low inflation isn't commonly seen in the emerging markets, but in contrast to the current inflation rate of nearly 6% annually, 2% doesn't seem so bad after all.
The “Selic” interest rate, the Brazilian benchmark, is expected to take a hike on January 18th and 19th. The rate currently rests at 10.25%
Emerging Market Austerity?
The new presidential duo looks more like developed world dignitaries than the leaders of the Latin American emerging market. However, now may be the time to prepare Brazil for a future of world leadership.
The country maintains a healthy trade surplus that will allow it to exhaust some of its pricey government debts that currently amount to roughly 40% of annual GDP. A policy implemented years earlier exchanged foreign debt obligations for currency-linked debt products, a move that saved the country billions of dollars and averted a growing trade imbalance. Later investments in infrastructure meant oil independence and made Brazil one of the greatest uses of hydroelectric power.
Wall Street would be wise to watch this new duo. Their plans, should they come to fruition, will set Brazil up for an internalized national debt, reasonable inflation rate, and real, positive economic growth while continuing the upside in the Brazilian Real. This is a pro-growth administration in an economy that, even without government intervention, was already set for explosion.