Mantega hails growth yet warns on strong real

Guido Mantega, Brazil’s finance minister, enthusiastically flashes charts from the International Monetary Fund showing global economic forecasts until 2012.

The economies of China, India and Brazil are predictably surging ahead while the eurozone is stuck in the doldrums. Notably, though, the charts show the US economy may finally be embarking on recovery.

Does this signal the end of what Mr Mantega famously termed the global currency war? “No,” he says categorically.

“There will always be currency war, whether it’s a cold war or an all-out war,” stresses Mr Mantega during an interview in São Paulo. “The exchange rate is one of the main drivers of competitiveness, more so even than productivity. Even as the US recovers, they will continue with quantitative easing because deep down it’s a trade strategy. This forces countries to defend themselves as best they can.”

The strength of Brazil’s currency, the real, is a long-term problem for the country’s businesses. The currency gained steadily against the dollar from January 2003, when former president Luiz Inácio Lula da Silva took office, until the onset of the global financial crisis. Brazil emerged from a short recession last year and the real resumed its upward course, driven by optimism over its growth and by the impact of loose US monetary policy on the steadily weakening dollar.

Brazil first retaliated by slapping a tax on foreign investment in domestic bonds last October. It spent more than $40bn intervening in the foreign exchange spot market last year.

Mr Mantega says these tactics succeeded and net flows turned negative in December. “The spot market is balanced,” he says. “Pressure now is coming from the futures market.”

In response, the central bank last week introduced curbs on short selling of the dollar against the real. Mr Mantega says more such measures are in the pipeline.

While the government blames the currency war for its problems, many economists argue that Brazil’s imbalances are as much of its own making.

They say excess government spending is one reason Brazil has had to maintain the highest policy interest rate, currently 10.75 per cent a year, of any big economy. The rate is expected to increase again as early as this month.

Mr Mantega – who has previously denied it – now recognises the link between public spending and inflation and, therefore, interest rates and the strong real.

Since he was reappointed by incoming president Dilma Rousseff, who took office on January 1, he has stressed the need to cut government spending as part of efforts to ease pressure on the currency.

He says Brazil’s expansionist policies, used in 2008 and 2009 to counter the global crisis, must now be reversed.

“In 2011, we will reduce the presence of the state as the economy is now standing on its own feet,” he says. “We are already cutting spending.” Instead of receiving one 12th of their annual budget for January, for example, ministries are receiving only one 18th, he says. But the true size of cuts will be known only when the 2011 budget is finalised in coming weeks.

In a startling turnaround, the government – which until recently regarded privatisation as anathema – is also preparing to put the country’s airports out to private concession and to float Infraero, the government body that owns and manages airports.

“We have to take very drastic measures to increase capacity in aviation and all infrastructure,” he said. Brazil will host the World Cup in 2014 and the Olympic Games in 2016.

He concedes that fiscal policy, including potential privatisations, will continue to be held hostage by a fractious political environment.

Efforts to contain an increase in the national minimum wage have been put in jeopardy by a row with the ruling party’s biggest coalition partner.