MercoPress. South Atlantic News Agency

Brazil's bank chief sees enduring growth cycle

Following nearly a year of recession under the left-leaning government of President Luiz Inácio Lula da Silva, Brazil is entering a cycle of enduring economic growth, the central bank chief said on Monday.

Months of fiscal and monetary discipline had created the conditions for a sustainable recovery, Henrique Meirelles told the FT in an interview. "The doubt is not whether Brazil can grow by around 3.5 per cent in 2004 and 2005 - it will," he said. "The question is whether it can grow at higher rates in the following years."

With a substantial easing of monetary policy in recent months, financial markets expect gross domestic product growth of 3.5 per cent next year. Yet many investors are uncertain whether South America's largest economy is entering a virtuous cycle of expansion or simply a correction from this year's slump.

Mr Meirelles argued that financial stability, including inflation and foreign exchange control, now provided far better conditions for growth than before Brazil's last rally of 4.5 per cent in 2000.

Contrary to forecasts of economic pundits, the central bank chief said that Brazil's large primary budget surplus - which is needed to service its debt - had become more sustainable. The government no longer relied on extraordinary tax revenue, would obtain the renewal in congress of key taxes, and would see substantial expenditure savings from a pending social security reform, he said.

Addressing entrepreneurs' concerns, he said: "There is an explicit government commitment not to raise the overall tax burden."

He admitted, however, that the government's ability to overcome regulatory uncertainty and create favourable conditions for private investments would be "very important" for growth in coming years.

The former Wall Street banker, who in January became the top monetary authority, cited rising industrial output, tax revenue and capital goods importation as indicators the economy was already recovering. Cofins, a tax on corporate turnover, for instance, rose 9.5 per cent in October, he said.

Industrial output in October is up 0.8 per cent over the same period last year, albeit slightly down from September.

Mr Meirelles admitted retail sales were lagging behind manufacturing and industrial output but insisted consumer demand would gradually recover, following recent interest rate cuts and a recovery in per capita income. While real average wages have fallen more than 15 per cent since last year, total inflation- adjusted income per capita, including bonuses and other benefits, had increased by more than 3 per cent between May and September in industry, he argued.

Still, consumer confidence indices released on Monday showed only a marginal improvement from two months ago. Of those questioned, only 4.2 per cent thought it was a good time to buy a car.

FT