MercoPress. South Atlantic News Agency

Brazil: lack of reforms greater threat than political crisis

Economists downplayed the impact of the Brazilian political crisis on the economy but warned that crucial reforms are being delayed as Congress concentrates in the corruption allegations.

A finance forum held in Campos do Jordao in Sao Paulo state convened Brazilian and foreign economists among which Kenneth Rogoff from Harvard University who painted a complicated scenario if pending reforms are frozen or the world faces liquidity problems.

"Imagine the ten year interest rate in the US climbs to 5 or 6%. This is going to cause problems in some emerging markets, particularly those highly indebted such as Brazil", indicated Mr. Rogoff who nevertheless felt optimistic about how to cope with such a situation.

"If investors look at Brazil they will see that the debt ratio has fallen, growth has picked up and things overall are improving", added Rogoff, but it's essential that pending social security and fiscal reforms are addressed.

The forum basically was trying to gauge the extent of the impact in financial markets of the a hundred days old ongoing political crisis which has strongly weakened the political standing of the ruling party and to lesser extent that of President Lula da Silva.

The worst scenario possible would be if Finance Minister Antonio Palocci, architect of the orthodox fiscal approach, was forced to resign as a result of the corruption allegations supposedly involving him when he was mayor of a Sao Paulo city.

A former aide of the Finance minister, solicitor Rogerio Buratti claims Palocci received money from local contractors and although he ratified before Congress the allegations, so far no evidence has been shown.

Paulo Leme head of Emerging Markets Research from Goldman Sachs & Co said the political crisis seems to be an excuse for politicians not to address crucial fiscal and social security reforms, which are needed to speed Brazil's growth rate.

"I believe the responsibility belongs to the political class, beginning with President Lula da Silva who should lead the reform process sharing it with the opposition", added Mr. Lemes.

"I think it's a terrible excuse to say that the political crisis is the reason for our inactivity and complacency with a very unsatisfactory growth rate".

In spite of a very favourable foreign scenario which helped Brazil reduce its country risk rating to the lowest since 1997, the country is set to expand 3 to 3,5% this year which is modest compared to other emerging economies.

"Current growth prospects are disappointing but anyhow Lula has done a far better job pushing ahead reforms than for example, Mexican president Vicente Fox", underlined Mr. Rogoff.

The orthodox policies of Mr. Palocci were clearly recorded in the latest release from the Brazilian Central Bank showing that the public sector primary budget surplus last July was equivalent 3,7 billion US dollars, a 37% increase over the same month in 2004.

Primary budget surplus in the first seven months of 2005 reached 5,16% of GDP compared to 5,08% the same period in 2004. GDP debt ratio in July was 51,3%.