Government spending, macro headwinds threaten Brazil’s economy : ex-central bank chief Fraga

Aug 29 (Reuters) – Insufficient government spending
cuts, rising global interest rates and tighter liquidity place
Brazil in a risky fiscal situation, a former governor of the
central bank said on Tuesday.

Reform efforts including a new fiscal framework designed to
limit escalating public debt and plans for tax reform are a
welcome step in the right direction, but likely insufficient,
said Arminio Fraga, who helmed Banco Central do Brasil (BCB)
from 1999 to 2002.

“I think it would be imprudent to count on ‘blue skies and
good weather’ going forward, sadly, we’re not in a position to
relax,” Fraga told the Reuters Global Markets Forum (GMF).

He said the government was not even considering classic
expenditure cuts, as it also faces hurdles passing reforms
through Congress.

“This leaves a fragile fiscal situation, in my view, into
the distant future,” Fraga said.

As the world’s biggest central banks signal ‘higher for
longer’ interest rates, Fraga noted the tightening supply of
available capital has historically darkened the outlook for
emerging market investments and growth.

Brazil’s central bank, meanwhile, cut interest rates in
August by 50 basis points to 13.25%, and policymakers have
signaled a similar pace of easing in subsequent meetings.

Despite August’s rate cut being more aggressive than most
expected, Fraga noted the bank remains understandably cautious
and will need to gauge the impact of lower rates on a
meeting-by-meeting basis.

He does not expect a favorable foreign investment backdrop
for Brazil even as investors shift away from China, given that
existing fiscal reforms may already be priced in.
(Join GMF, a chat room hosted on Refinitiv Messenger: https://tinyurl.com/yyr3x6pu)
(Reporting by Lisa Mattackal in Bengaluru and Divya Chowdhury
in Mumbai; additional reporting by Marcela Ayres; Editing by
Josie Kao)