Fitch Ratings cut Brazil’s credit to junk status Wednesday, the second of the big three agencies to rip away the nation’s hard-won investment grade status and igniting fears that the recession enveloping Latin America’s biggest economy will last longer than expected.
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Many investors are now asking themselves whether Barbosa can steer Brazil out of the recession when Levy, an experienced, University of Chicago-trained economist, could not.
There were dueling protests in Brazil this week, on Sunday some 40,000 people went to the streets of Sao Paolo and there was another protest in support of Rousseff on Wednesday which saw 50,000 people take to the streets of Rio de Janeiro, host of next year’s Olympics. Levy had trouble persuading Congress and Rousseff’s cabinet to adopt large parts of his austerity plan.
The government is trying to reintroduce the tax to raise revenues, but Congress is balking at passing it.
At a news conference, Barbosa said his priority would be bringing about fiscal balance.
Rousseff’s leadership is in crisis, as she faces possible impeachment proceedings in a financial scandal.
Brazil’s gross domestic product is forecast to contract by 3.5% this year, the 12-month inflation rate is in double digits, and the country’s budget deficit has grown to close to 10% of GDP.
Goldman Sachs analysts anticipated a negative market reaction to the replacement, “both because the administration loses a talented minister, and also because his departure could signal a shift back to fiscal heterodoxy”.
The real weakened more than 1 percent on Friday, depressed by speculation over Levy’s departure. He said the government needs to cut spending and seek deeper structural reforms to improve its finances.
Levy’s exit comes just 24 hours after the Fitch ratings agency downgraded Brazil’s rating to junk status. “But Rousseff was not happy about cutting spending, so he was overruled many times”.
“We need clarity from the government to remove uncertainties and return to growth”, Levy said.
“While Levy advocated a stronger stance on fiscal adjustment, Barbosa is seen as a more heterodox economist, more in favour of countercyclical measures and likely to be more receptive to interference from President Rousseff”, said João Ribeiro and Mario Robles, economists at Nomura, in a note.
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President Rousseff has repeatedly denied accusations that she manipulated budget figures to disguise her government’s poor fiscal performance, a crime under Brazil’s Fiscal Responsibility Law. “Growing dysfunction at the heart of Brazil’s government adds to the reasons for monetary policymakers to be hawkish”, Mr Shearing said. “The downgrade was a warning call and we have the capacity to change our path”.
