Palocci's value

Brazil's economy

Aug 25th 2005 SÃO PAULO
From The Economist print edition

Worries about the finance minister

“NO ONE is indispensable,” declared Brazil's finance minister, Antonio Palocci, in the course of a two-hour press conference called to rebut allegations of corruption against him. A scandal over illegal payments to legislators and irregular party financing has already toppled leaders of government, Congress and the ruling Workers' Party (PT), to which Mr Palocci belongs. On August 19th it reached Mr Palocci himself. A former aide who became a manager of a rubbish-collection firm accused him of taking a monthly pay-off from the company (and passing it on to the PT) when he was mayor of Riberão Preto, a city in São Paulo state. For the first time since the corruption scandal began in May, speculators panicked, dumping Brazilian bonds, shares and the real.

The aide offered his testimony as part of a plea-bargain, and Mr Palocci's self-defence was spirited. That initially calmed markets down, but then the edginess returned. Although the economy is fairly sound, the scandal could yet shake it. Mr Palocci has been the government's champion of tight fiscal and monetary policies. These have saddled Brazil with the world's highest real interest rates and exporters with an uncomfortably strong currency. Yet they have also held down inflation and public debt—a big reason why the political crisis has not been accompanied by an economic one.

So far, Mr Palocci has managed to combine stability with moderate growth. In 2004 the economy grew 4.9%. Growth is likely to slow to 3% this year before picking up again in 2006. Even with the strong real, exports are booming. The trade surplus is heading for a record $40 billion this year, which makes foreign debt more manageable and helps shield the economy from financial panics. Domestic credit is buoyant, thanks partly to government wheezes such as bank loans repaid from workers' paycheques. Lending to households is rising sharply, helping sales of white goods, notes Mario Mesquita, an economist at ABN Amro, a bank.

Investment, though, has lagged. Although sales of machinery and equipment are growing strongly, construction, which accounts for two-thirds of investment, is weak partly because of high interest rates. Inflation is edging down towards the central bank's target of 5.1%, which ought to allow a long-awaited easing of monetary policy. That will not happen if markets lose faith in the government's commitment to stability.

Mr Palocci insisted that his policies would survive even if he is forced out. That is probably true. Brazil's president, Luiz Inácio Lula da Silva, has backed him staunchly, in part because abandoning austerity would be unpopular. According to IPSOS, a polling firm, voters are unwilling to sacrifice low inflation for faster growth. Were Mr Palocci to go, Lula would probably replace him with a like-minded technocrat, such as one of his aides. But there would be a cost.
Next to Lula, Mr Palocci is the PT's weightiest politician in the government and the ablest defender of austerity and economic reform. His exit would demoralise an embattled president. A successor with the same ideas might have more difficulty realising them.

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