Dilma's first big test
The political wounding of Antonio Palocci, the president’s right-hand man, comes at an awkward time, when the battle to cool the economy has only just begun
Jun 2nd 2011 | SÃO PAULO | from the print edition
..THE honeymoon Dilma Rousseff has enjoyed since becoming president of Brazil on January 1st has suddenly ended. She faces a modest but steady and damaging rise in inflation. She must push through unpopular measures to cool the economy and sustain growth in the medium term, and to fulfil her promise to make the state more efficient. Her vast but disparate coalition in Congress is showing the first signs of political infighting. Her difficulties are embodied in the travails of the man appointed to manage the politics of this economic balancing act, Antonio Palocci, her chief of staff.
Last month the Folha de S. Paulo, a newspaper, published confidential information showing that between 2006 and 2010, when Mr Palocci was a federal congressman, his personal wealth rose 20-fold as a result of consultancy work. Elected politicians in Brazil are allowed a business sideline. Mr Palocci refuses to give details of who paid him, or for what, on the grounds of client confidentiality. His enemies insinuate that it was not his political insights that were worth so much, but his influence and connections. His business dealings are now being investigated by the public prosecutor’s office.
As finance minister during the first presidential term of Luiz Inácio Lula da Silva, Ms Rousseff’s predecessor and political mentor, Mr Palocci imposed the fiscal austerity that transformed his boss from socialist firebrand into darling of the financial markets. In 2006 he was forced to resign after claims, never proven, that he had leaked the bank records of a concierge who had told the press of his presence at a house in Brasília where orgiastic parties were held by his political associates. But Mr Palocci retained the respect of businessmen and investors, and remained influential within the ruling Workers’ Party (PT). Restored to government by Ms Rousseff, his job has been to do much of the arm-twisting that is essential in Brazil’s coalition politics.
Latin American politics
His political wounding has already hurt the president. On May 24th all but one of the 73 lower-house deputies of the catch-all Party of the Brazilian Democratic Movement (PMDB), the PT’s main coalition partner, voted for an amendment to a new Forestry Code to grant an amnesty for illegal logging before 2008. That went against Ms Rousseff’s express wishes, and was a defiant challenge to Mr Palocci, who had threatened the party with ministerial sackings should its deputies rebel. The PMDB’s barons were already displeased with what they regarded as a meagre clutch of ministries and other important jobs in Ms Rousseff’s government, but had hitherto toed the line. The following day evangelical and Catholic politicians obliged the government to scrap plans to show videos with an anti-homophobic theme to school pupils, threatening that they would otherwise back calls for a congressional inquiry into Mr Palocci’s sudden accession of wealth.
All this comes after a bout of pneumonia kept Ms Rousseff out of the public eye for much of May. Into the vacuum leapt Lula, after he concluded that a telephone call from the president asking for advice was really a cry for help. He appeared in Brasília for two days of shuttle diplomacy with coalition partners and rank-and-file PT legislators. That made Ms Rousseff look incapable of standing on her own two feet—a dangerous perception for a female boss in a country with very few of them.
The immediate worry is that all this could water down or delay the measures needed to cool an overheating economy. Even though the real has been appreciating to a level that is uncomfortably strong for manufacturers, the inflation rate has steadily been edging up. It has risen from 4.2% in October 2009 to just over 6.5% in April, when it breached the ceiling of the Central Bank’s target. In the same month the price of services was 8.6% higher than a year before. Bank credit rose by 21% during the same 12 months, well above the 10-15% increase the Central Bank regards as comfortable. Most economists think unemployment, at 6.4%, is so low that rising wages are pushing up inflation.
Ms Rousseff’s government is trying to slow the economy, but gently. The Central Bank has raised its benchmark rate three times this year, taking it from 10.75% to 12%. But it remains much lower than in mid-2008, when the bank last applied the brakes. The government has also imposed a clutch of new taxes on lending and stricter reserve requirements. But big banks say they still expect their lending to expand by another 15-20% this year.
The president has ordered a fiscal tightening: the primary surplus (ie, before debt payments) has risen to 3.3% over the first four months of the year, up from 2.2% in the same period last year. But that is mainly because of robust tax revenues. Government spending is still 13% higher than a year ago in nominal terms, and the squeeze has fallen mainly on public investment, rather than on civil-service payroll costs or other current spending.
The main hint of a slowdown has come from an unexpected dip in industrial production in April. But that probably reflects the impact of the strong real. The risk is that once inflation starts to pick up in Brazil it becomes entrenched, argues Marcelo Carvalho of BNP Paribas, a bank. “Then you end up having to hike rates hard and squeeze government spending for a long time to get it back under control.”
Ms Rousseff has promised to do “whatever it takes” to control inflation. She knows that much of Lula’s enduring popularity came from the fact that his governments managed to combine economic stability and faster growth. Their policy discipline relaxed only in 2010, when economic growth of 7.5% helped to get Ms Rousseff elected. The corresponding political calculation is that bearing down hard on rising prices now would be far better than an involuntary squeeze closer to the next presidential election in 2014.
For months the economic analysts polled each week by the Central Bank have been forecasting ever-higher inflation for 2011. Over the past few weeks the predicted number has started to fall (and most now expect economic growth of only 4% this year). But the public is much less sanguine than the experts. According to a poll by the National Confederation of Industry, published on May 30th, the share of Brazilians who think that inflation will rise further in the coming months has reached 71%—higher than at any time since 2001. The poorest are most pessimistic. With or without her right-hand man, Ms Rousseff will have to act decisively if these expectations of inflation are not to become a self-fulfilling prophecy.