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Henrique Meirelles: Business as usual

Sep 1, 2013

Policymakers must focus on fundamentals as global liquidity tightens, says Brazil’s former central banker Henrique Meirelles. Breaking with consensus, he insists his country is on the right track

By Thierry Ogier

Once a central banker, always a central banker – or so one might be forgiven for thinking of Henrique de Campos Meirelles. Three years after stepping down as the head of Brazil’s central bank, he remains as unflappable as at any time during his eight years at the helm of the monetary authority.

In an interview with LatinFinance, Meirelles says Brazil is on the right track and that the world economy is on the mend – views sharply at odds with a growing consensus.

He dismisses outright the suggestion that global financial markets could be heading for renewed turmoil, despite a sharp rise in volatility in 2013.

"There is no turmoil," he says. "Real turmoil was the post-Lehman events, I don’t see this happening now," says Meirelles, who, as a central banker, was long regarded as the guardian of orthodox monetary policy.

Where some see growing imbalances between developed and emerging markets – which in the second quarter of 2013 triggered the biggest retrenchment of capital from Latin America since the global financial crisis – he only refers to a "normal change" in capital flows. "Instability is part of the overall adjustment," he says.

The 2008 financial crisis marked a turning point globally, as advanced economies bore the brunt of the adjustment while emerging markets soared. But today, China’s transition towards a slower, more consumer-oriented economy, and an eventual tightening of US monetary policy are not negative events, he says.

"The recovery of the US economy is very good news," he says. He is also confident that global demand for food and soft commodities will remain strong – factors he says will boost markets.

He acknowledges that global monetary tightening will throw up difficulties for countries with current account deficits, but says this requires an adjustment that’s all too welcome.

"The end of easy – maybe excessive – liquidity is going to happen, which means that the abundance of funding for current account deficits is ending," he says. "Policymakers will have to pay attention to the fundamentals, which means a more sustainable current account balance – not relying on borrowing, but one consistent with the level of foreign direct investment."

The 68-year old banker is still reluctant to comment on Brazilian economic policies, partly out of courtesy to the government and his successor. But the views he is willing to share nevertheless buck conventional wisdom in their optimism.

A growing number of observers argue that Brazil’s flagging economy is partly the result of bad policies – and a lack of structural reforms. But Meirelles, who now chairs the local subsidiary of Lazard Americas, insists the country is not lagging behind in its reform efforts.

He acknowledges that there is a need to overhaul the tax system "to make it more efficient", to modernize infrastructure, and to boost productivity.

"We must do [these things], and that does not mean that we can take too long," he says.

But he says progress is being made. "Brazil has already taken some important steps, such as the fiscal responsibility law... Yes, there is [an appetite for reforms]."

The Brazilian current account deficit – which is in excess of 3% of GDP – is still "sustainable". He says: "It is still compatible with the level of FDI, despite the fact that [the deficit] this year will be somewhat higher, which is affordable."

A sharp drop in Brazil’s currency, the real, has alarmed many observers, but Meirelles remains unmoved, saying it simply reflects a normal process of rebalancing. While the depreciation may be a challenge, it is nevertheless "necessary" and the process "simple," he says. "The change in the exchange rate reflects the drive towards rebalancing the current account balance to a more sustainable level. With the real moving from 1.8 to the dollar, to 2.2 or 2.3 or more, it is part of the rebalancing."

"We are going through a process of change in the relative prices in the economy. The part of the society that produces tradable goods are gaining income, relative to the ones who consume tradable goods and produce non-tradable goods, including services."

Even the dramatic collapse of the business empire of Eike Batista, following several heady years for the Brazilian corporate world, fails to trouble Meirelles. "This is the normal course of business. Corporations and entrepreneurs raise money. They have to deliver results. And if they don’t do very well, stock prices fall. It is as simple as that. One has to deliver what it is supposed produce. There is nothing new here, there is no earth-shaking event."

Brazil still first

In Latin America, Brazil is seen as less market-friendly than Mexico, which has embarked on an ambitious economic reform program.

"At the moment Mexico is probably the [regional] star. Definitely it is addressing some of its key problems. We must congratulate it," says Meirelles, adding that the country should be an inspiration for the rest of the region.

But he rejects the suggestion that Mexico could become the largest Latin American economy. That title, he says, will remain Brazil’s – no matter the challenges at hand. LF

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