S&P unimpressed by Brazil's new industrial policy

Tue May 13, 2008 5:29pm EDT
By Walter Brandimarte
NEW YORK, May 13 (Reuters) - Brazil's recently-unveiled plan to boost exports and specific sectors of the economy was taken with a pinch of salt by rating agency Standard & Poor's, which noted the high fiscal costs to be incurred by the government.
Brazil will deliver up to 21.4 billion reais ($12.7 billion) in tax breaks through 2011 in an attempt to bolster the economy, Finance Minister Guido Mantega announced on Monday.
The plan will likely benefit sectors that have been hurt by the appreciation of the Brazilian currency. But S&P, which upgraded Brazil's credit ratings to investment grade less than two weeks ago, said "picking winners and losers" might not be the best approach.
"Another option would be to improve investment climate, cut taxes across the board, reduce the cost of doing business in Brazil," S&P analyst Lisa Schineller said on Tuesday on the sidelines of a conference organized by the Brazilian-American Chamber of Commerce in New York.
Schineller noted that government initiatives to promote targeted sectors has worked in many Asian countries but said there is always the risk that the government might "be trying to make competitive a sector that is not going to be competitive."
Brazil has "some room" to accommodate the increased fiscal stimulus, Schineller said, adding however that S&P would prefer to see policies aimed at reducing the country's debt-to-GDP ratio at a faster pace.
Exporters have long complained that the strength of the real, currently at a nine-year high against the dollar, are making Brazilian products less competitive abroad. Brazil's upgrade by S&P, although widely celebrated in the country, left exporters even more concerned as it raised prospects of further currency appreciation.
But Schineller said that the return of current account deficits in Brazil, coupled with some growth slowdown, should curb the real from strengthening even more.
"I see it moving close to 1.8 reais per dollar by the end of this year. That's the scenario I'm working with," said Schineller.
The real closed at 1.657 per greenback on Tuesday.