Arminio Fraga about a macro-economic tripod: we have an unstable two-legged animal – 12/01/2019 – Market

Brazil faces the biggest challenge in its history of public accounts storage. According to the economist, partner of the manager Gávea Investimentos, the exchange rate was uncontrollable like that of the former president of the Central Bank of Brazil (BCG), Armínio Fraga, 61, who contributed to the design policies adopted after the forced change of the exchange rate regime in January 1999.

public accounts in recent years has led the so-called macroeconomic tripod to become an "unstable, two feet only".

When mr. was called to take the Central Bank?

On the 30th [de janeiro de 1999] which was a Saturday, I was called. I have told this story a thousand times. Over the weekend, I spoke with Pedro Parente [então ministro-chefe da Casa Civil] Pedro Malan [então ministro da Fazenda] and President [Fernando Henrique Cardoso]. They invited me and I met them. On the second day, I resigned and returned to Brazil the same day.

It was February 1st.

The biggest fear at that time was that Brazil repeats the experience of Mexico four years earlier, according to which inflation would reach 10%. In the tequila crisis?

That. If you look at the graphics and what happened there, it's very similar. In our case, there was the gene for indexing in people's heads. It seemed like a big risk. Our challenge was to stabilize things.

For me and my colleagues, I could not go back to the fixed exchange rate, although many people thought about it at the time. It has even been spoken in "monetary" [atrelar o câmbio à variação de outra moeda]. So what came up as an alternative – and this was a subject I had studied – was to adopt the inflation targeting system.

At that time, we also renegotiated the agreement with the IMF, adopting the objectives as criteria. was, at the time, a novelty for the Fund. No one had ever realized with the institution a program that was not a more traditional monetary system.

What was the traditional program?

This is how one examines the monetary objectives, the bank credit, the reserve objectives. We had a bad story with this model. It has never worked so well. We went directly to the goal system. We have made it clear that the exchange rate will fluctuate and we have done a balance-of-payments work to avoid a more nervous exchange rate behavior, which would have inflationary consequences.

We sharply reduced the interest and, the next day, when the market was open, we received a positive signal, the interest rate curve reversed, the long-term rate is falls. It was a sign that things were stabilizing. In the middle of the year, we set targets, from 8% for 1999 to 6% [para 2000] then 4% [para 2001].

We were aggressive because inflation had fallen to a very low level the year before. That was the bet we made, it worked. Expectations easily stabilized.

Inflation for the year was established at about 9% [8,94%] and the next two years corresponded to the goal. It was a small miracle.

What contributed to its operation?

Very rigorous in various fields, particularly in the fiscal and monetary fields. Inflation continued to rise in the target until the great crises of 2001, an extremely complicated year.

What has been the repercussion on the performance of the economy?

Yes. There were more or less disciplined periods, but overall the system worked well. He began to make water when the policy became somewhat schizophrenic after the departure of Palocci. At that time, the government [de Dilma Rousseff] tried to undo, with the banking policy and then with the fiscal, with all creative accounting, then pedaladas, all that British Columbia had tried to do. It was a very confusing phase, but despite that, the system gave a reasonable account of the message.

Today, we know that the wrong side of the model of the new hyperinterventionist matrix was not just a question of economics. an economic problem, has become a political and institutional problem. The fact is that it has undermined the ability of the economy to grow, which has also dampened investment. It was an absolute disaster.

But in hindsight, the system worked. The swellings were a little undone. The current staff of the Central Bank has acted with great skill and at least made a lemonade from this lemon because it has depression, we will correct inflation soon, and it's done thing .

The fact that some policies, such as inflation goals, have been institutionalized helped?

Yes, although it is no longer a tripod. It has turned into a more unstable bug as it only has two feet. The tax side is about to come. The Temer government had the idea of ​​social security reform, but it did not take revenge.

The hole continues. An elected government signals that you intend to act in this area, and that is fine. Today, the scale of the challenge is the largest in our history.

Why does Brazil have more debt than ever? Its budget deficit remains close to the largest in history. And the tax burden is already very high. The political space to increase the tax burden therefore seems limited. It is a huge threat that must be the subject of a very credible and structural response.