Brazil - Economic Briefing January 2003

Lula Assumes the Presidency amid Rising Inflation and Moderating Activity

Luis Inácio da Silva (‘Lula’) was sworn in as new president on 1 January and has promised to remain committed to the sound macroeconomic policies adopted by his predecessor, while simultaneously combating poverty and social inequality. The new president’s team reflects pragmatism and a continuance of economic policy but is already facing its first challenges of bringing down inflation with consistent monetary policy and creating the necessary conditions to boost the economy.

Lula assumes presidency with new economic team
On 1 January, Luis Inácio da Silva (‘Lula’) from the Brazilian Worker’s Party (PT, Partido dos Trabalhadores) was sworn in as president. Lula had won a comfortable victory in the second round run-off election on 27 October over his challenger José Serra, from the incumbent president Cardoso's Brazilian Social Democratic Party (PSDB, Partido da Social Democracia Brasileiro).

Economic policy foundations to remain unaltered
The new president has pledged to remain committed to the sound macroeconomic policies adopted by his predecessor Fernando Henrique Cardoso. This would imply that the cornerstones of the economic policy are upheld, among them the current floating exchange rate regime, inflation targeting and rigorous fiscal discipline. Furthermore, the Lula administration has endorsed the terms of the country’s current US$ 30 billion stand-by loan agreement signed with the International Monetary Fund (IMF) in August.

- Finance minister known for responsible economic policies. The president’s economic team reflects his desire to break from his past left-wing orthodoxy in favour of a more pragmatic approach to economic policymaking. The new finance minister, Antonio Palocci, is a former medical doctor and PT mayor of the city of Ribeirao Preto in São Paulo state. While governing in Ribeirao Preto, Palocci’s governing approach was marked by his commitment to responsible economic policies. The new finance minister was one of the key developers of Lula’s electoral economic programme and is known for his desire to maintain fiscal discipline and contain inflation. The new finance minister also hopes to ease political control over the Central Bank, trim the existing pension benefits for civil servants and reform the current state-run system for collecting the value-added tax.

- New Central Bank president demands fiscal discipline. The new Central Bank president, Henrique Meirelles, a former executive at FleetBoston Financial Corp and elected congressman from the PSDB has explicitly endorsed the previous government’s inflation targeting as a key guideline for monetary policy but has suggested that the timeline of the current inflation targeting scheme may be extended. The new chief has stated that the key to lowering interest rates will be the government’s ability to abide by fiscal discipline and implement economic policies, particularly tax and pension reform, that help lower Brazilian risk perceptions.

- Foreign minister advocates freer trade. The incoming government is also not expected to reverse existing trade policy framework significantly in favour of a more protectionist approach. The foreign affairs minister, Celso Amorim, is a career diplomat and former Brazilian ambassador to the World Trade Organisation (WTO). The development, industry and trade minister, Luiz Fernando Furlan, is a former executive of one of the country’s large meat producers and is a strong advocate of freer trade.

Governance complicated as Lula’s party lacks majority in Congress
However, the new president’s political party, the centre-left PT, has only 91 of the 513 seats in the Chamber of Deputies and 14 of the 81 seats in the Senate. Even though the PT currently enjoys the support of most smaller left-wing parties, the president will not have a working majority in Congress and effective governance will depend on forming alliances with one of the larger centrist parties, such as the Liberal Front Party (PFL, Partido da Frente Liberal) or the Brazilian Democratic Movement Party (PMDB, Partido do Movimento Democrático Brasileiro). The government’s leverage in regional governments is also weak with only three of 27 governorships, which could prompt opposition governors to band together to block policy initiatives from the central government.