Brazil’s answer: spend, spend, spend

June 27, 2012 5:48 pm by Jonathan Wheatley, Financial Times

Eight thousand trucks; 3,000 tractors; 30 mobile missile launchers; 3m items of school furniture. These are some of the things the Brazilian government will buy in an R$8.4bn ($4.1bn) spending spree announced on Wednesday.

It’s an extraordinary programme. Not just for its size but also for some strangely candid admissions it makes along the way – and for what it says about economic policy.

The package is dubbed the “PAC Equipamentos“  – PAC from the government’s flagship accelerated growth programme (PAC in Portuguese) and equipamentos because that is what it will buy. Of the R$8.4bn in the programme, about R$6.6bn is additional to spending already planned.

So, what makes it odd?

First, its language. It arrived in our inbox as “measures to tackle the deceleration of the economy” (although over on the finance ministry website the target is “deceleration of the global economy”).

“These anti-crisis measures strengthen our condition to overcome the difficulties of the international scenario,” the programme says, adding that they are being introduced “when the Brazilian economy is already returning to growth”. So the finance ministry can’t quite admit that Brazil’s economy is in trouble, though the hints are pretty strong.

Second, its take on foreign exchange policy. While the government has made no secret that it is fighting a “currency war” with the unfairly devalued currencies of its trading partners, the central bank has always denied that it targets or manipulates the exchange rate. Yet the programme contains a chart – “Permanent action on the exchange rate” – showing just how effective and, er, permanent this action has been.

Third, its inclusion of a reduction in the TJLP, the long term interest rate that the BNDES, the state development bank, charges for its lending (borrowers typically pay the TJLP plus a margin charged by the commercial bank handling the loan). This will fall from 6 per cent a year to 5.5 per cent. Bear in mind that (according to the programme presentation) market lending rates are an average of 25 per cent a year to the corporate sector.

The presentation says cutting the TJLP will deliver “yet another reduction in the cost of finance to investors borrowing from the BNDES”. It will also deliver a bigger bill to the taxpayer and a further distortion of Brazil’s credit market, making it even harder for those companies not favoured by government policies to raise finance.

The PAC Equipamentos is further confirmation that the government believes the way to encourage investment and growth is to pick winners and back them at the expense of everyone else. No doubt bosses and labour unions in the automotive industry will be delighted. Those labouring in other parts of the economy – who would be more grateful for a level playing field and removal of across-the-board distortions such as Brazil’s tax and labour systems – will be dismayed.

Still, nothing like a crisis – especially one you deny is really there – to bring out the old instincts. The Brazilian state is settling ever more comfortably into its position at the centre of the real economy.


About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton,, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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