Luiz Carlos Mendonça de Barros: First of all Lula will not be running this time and Serra is a strong character. Brazilians don´t vote for parties but for personalities and Serra has the kind of background voters like. He has a good track record as health and planning minister in the governments of Fernando Henrique Cardoso. Everyone knows Lula´s economic policies are the same as those of the Cardoso administration and Serra would continue with them so having Serra as president would bring continuity.

Mendonça de Barros: There is no doubt that Serra is stronger than any other potential candidate inside and outside the PSDB. The Datafolha poll published earlier this month showed that he would convincingly beat all potential opponents. He had around 38% of voting intentions and was 20% ahead of his rivals. The main pro-Lula candidate is Ciro Gomes of the PSB who came second and the main opposition candidate after Serra is Heloisa Helena of the PSOL who had 18% and 13%, respectively. When Neves replaced Serra as the PSDB candidate in the polls he came third with only 15%.

Mendonça de Barros: I don´t think he would take that risk.

Mendonça de Barros: One thing we can be sure of is that if the PT does have a candidate it won´t be Lula. I think the fiasco in Venezuela, where Hugo Chavez failed to win approval to extend his mandate, has put an end to any idea of altering the constitution to allow Lula to stand again. The PT does not have any strong candidates with mass appeal. I´m not sure Lula would even endorse any candidate he felt would lose.

Mendonça de Barros: They have no chance. The Datafolha poll showed they had very little support. Marta Suplicy only got 6% and Dilma Rousseff 2%. In any case they are not well known enough. Brazilian voters learned not to vote for someone who was virtually unknown after the Collor affair. You cannot create a presidential candidate in one or two years.

Mendonça de Barros: There has been a change in their perception of the country. One of Lula´s achievements has been to get rid of the idea of the PT as a revolutionary party. He has focused on controlling inflation and let the Central Bank handle it without any interference. Brazil is not like Venezuela where Chavez is trying to build socialism or Argentina where Peronism is still important. When foreign investors look at Latin America they focus on Brazil and Mexico and, to a lesser extent, Chile. Brazil is growing faster than Mexico for the first time. This is because Mexico is tied to the United States and is suffering from the problems affecting the US economy while Brazil is doing more and more business with China and benefiting accordingly. Foreigners are still interested in investing in Brazil either in the stock market or by acquiring companies. There are also private equity funds with large amounts looking for investments. Brazilian companies are also starting to raise their profile abroad and show their efficiency. Vale is a good example of this.

Mendonça de Barros: I expect the strong growth in domestic demand and industrial production to continue. There are no great inflationary pressures apart from food prices but the risks of a consistent rise in inflation are increasing even considering the strong rise in investments and imports. The investments should have a stronger effect on containing the rise in the use of installed capacity from 2008. I think the Central Bank will remain cautious in the short term and keep interest rates unchanged at 11.25% for the coming months. These rates are 2% higher than they really should be but one cannot expect the Central Bank to slash them abruptly. In the medium term to mid-2008 I think we could have a new stage in which the interest rates will converge to levels which are more in line with international standards. However, this will depend on the global situation and the interaction between the growth in demand and the aggregate supply.   

Mendonça de Barros: In principle, a sovereign wealth fund is a good idea. However, it should be funded from savings and not from debt. A country like Singapore may have US$ 10 billion to invest but that´s not the case with Brazil which will have to issue debt to pay for the dollars it buys. The net debt/GDP ratio is around 43.7% and the last thing we need at the moment is more public debt.

Perhaps it would be better to adopt measures which would allow the free flow of resources from Brazil abroad and vice-versa which would counter the exaggerated appreciation of the Real.  The government should end the need for companies which obtain resources abroad to bring them to Brazil since this means they do not have the freedom to use these resources as they want, such as to pay foreign suppliers. There are situations in which an exporter has to bring the dollars to Brazil and then has to send them out again to pay for equipment made in other countries, for example. This increases the company´s financial costs. Imagine how much extra a company like Embraer which imports a lot of components from abroad has to pay in its financial costs.

A sovereign wealth fund is also not a good idea for funding the BNDES. The BNDES can fund itself by raising resources directly on the foreign markets as it does today. It would also cause fiscal problems since the BNDES makes loans at rates which are well below the market rates.

Mendonça de Barros: I don´t think that the discussions over a sovereign wealth fund will hold Brazil back from obtaining investment grade. I think this will come but I´m not sure it will make that much difference as it is widely expected and some Brazilian companies already have investment grade. 

© John Fitzpatrick 2007