Home' Trinidad and Tobago Guardian : June 11th 2015 Contents BG20 REGIONAL
BUSINESS GUARDIAN www.guardian.co.tt JUNE 2015 • WEEK TWO
You can tell that a relationship is dire when one of the
parties trumpets that it is being "reinvented," while
the other urges that the couple shouldn t "turn their
backs on each other."
The first declaration came from Enrique Peña Nieto, Mexico s
president. The second was made by Dilma Rousseff, his Brazilian
counterpart, who was paying her first state visit to Mexico from
May 25-27. The two promised a new start. They pledged to boost
trade and signed agreements to facilitate investment and expand
air links. And they toasted each other with Mexican tequila and
Brazilian cachaça, the cane liquor used in caipirinhas.
Brazil and Mexico are the two giants of Latin America. Between
them, they account for more than half of the region s population,
GDP and exports. And yet they have largely ignored each other.
True, bilateral trade has doubled over the past 10 years, but only
to US$9.2 billion a year; neither is among the other s top seven
trading partners. When in 2012 Brazil found itself with a negative
trade balance in cars under a free-trade pact, the country tore up
the pact and replaced it with a quota system.
Investment is an exception to the general coolness. Brazil is now
second only to the United States as a destination for Mexican foreign
"There s no big Mexican firm that isn t in Brazil," said José Antonio
Meade, Mexico s foreign minister. Mexico s investment of US$23
billion dwarfs Brazilian investment in Mexico (of US$2 billion),
though that is now growing.
The presidents agreed to start talks in July on revamping their
modest (non-car) trade agreement. The plan is to increase from
800 to 6,000 the number of items covered by the accord, broadening
it to agriculture, services and government procurement. Rousseff
said she hopes bilateral trade will double again by 2025.
It is easy to be cynical about the visit. Both presidents head
unpopular governments wounded by scandal. Some of their pred-
ecessors made similar promises of closeness that proved empty.
In practice their countries often act as adversaries. Both fielded
candidates to lead the World Trade Organisation (Brazil won). Brazil
failed to back a strong Mexican for the top job at the International
Monetary Fund. They do not co-ordinate at the G20 group of world
powers, nor on climate change.
More has divided the two countries than united them. They are
separated by language and distance; a non-stop flight between
Mexico City and São Paulo takes almost 10 hours. Above all, they
have different views of the world and their places in it.
By joining the North American Free-Trade Agreement with the
United States and Canada, which took effect in 1994, Mexico
accepted that its economic destiny lies mainly to the north, not
the south. It has embraced free markets and globalization. It paid
little attention to South America, at least until it joined Chile,
Colombia and Peru in the free-trading Pacific Alliance in 2012. In
international politics, Mexico remains a timid power; Brazil has
almost three times as many diplomats.
Brazil has spent the past 20 years trying to build a South American
bloc whose core is Mercosur, a protectionist would-be customs
union. Its economic instincts are dirigiste, and its foreign policy
prizes "autonomy" (meaning from the United States). Recently, it
has made the BRIC grouping that joins it with Russia, India and
China a priority.
"It s part of Brazil s foreign policy to exercise leadership in Latin
America by exorcising Mexico because of its ties to the United
States," said Andrés Rozental of the Mexican Council on Foreign
Relations, a think-tank.
But Rousseff, grappling with a recession, faces demands from
Brazilian business to seek new markets. She has quietly put more
emphasis on increasing trade. In response to the Pacific Alliance,
she is seeking to speed up agreements under which Brazil s trade
with Peru and Colombia will become tariff-free. It already is with
Chile. She is due to visit Washington this month in an effort to
improve fractious relations and talk business with the United States.
She spoke of a new "tequila-caipirinha axis" between Brazil and
Mexico. Latin America would benefit were this to come into being,
and not just economically. If its two big powers worked together,
the region would be closer to co-operating on such problems as
the flouting of democratic norms in Venezuela.
Yet Rousseff s overture to Mexico looks to be part of a tactical
shift, not a fundamental change, in foreign policy. And Peña shows
no real sign of abandoning Mexico s long habit of punching below
its weight in the world. Tequila and caipirinha are both intoxicating,
but most people prefer not to blend them.
People who live in São Paulo say their restau-
rants are the equivalent of Rio de Janeiro s
beaches: the main sites of recreation and
refuge from the teeming city. These days
they are emptier than usual. When they eat
at home, residents of the city are switching
from beef to chicken and vegetables, which are cheaper.
This change in dietary habits is caused by the gloom that
has enveloped Brazil for much of the past year. A recession
is looming. The economy shrank by 0.2 per cent in the first
three months of 2015, and by 1.6 per cent between that
period and the same quarter a year before. Employment
and real incomes are contracting; interest rates and inflation
The country feels leaderless: The president, Dilma Rousseff,
has been weakened by a mammoth scandal at Petrobras,
the state-controlled oil company, as well as by the economy s
And yet Brazil s embattled government is making progress.
In particular, it is beginning to restore the economic credibility
that Rousseff squandered during her first term as president,
from 2011 to 2014. She has given strong backing to her
budget-cutting finance minister, Joaquim Levy. The Central
Bank has turned serious about fighting inflation since Rouss-
eff was re-elected in October. Brazil s Congress, which is
dominated by unreliable allies of the government and
outright opponents, has so far not managed to thwart them.
"This is Brazil under new management," said Marcelo
Carvalho of BNP Paribas, an investment bank.
Levy s top priority, to hold on to Brazil s investment-
grade credit rating by cutting the budget deficit, came closer
to realisation in late May when the Congress approved cuts
to welfare spending, in particular to unemployment insurance
and to survivors pensions. This should save the government
8 billion reais (US$2.6 billion) in 2015. Earlier, Levy had
slashed 70 billion reais from planned discretionary spending
for 2015, the biggest such cut in history, and raised taxes,
including fuel duty, which should yield 26 billion reais in
revenues this year.
Levy has not gotten everything he wanted, though. A
bill to end costly payroll-tax breaks will face opposition in
Brazil s Congress. Legislators also have tacked on to the
welfare reform a measure that would change how pensions
are calculated for civil servants who retire early. It would
double the government s pension bill to 15 per cent of GDP
in less than a decade, according to Fabio Klein of Tendências,
a consultancy. Rousseff is expected to veto it.
Few analysts expect Levy to hit his main targets, a primary
surplus (before interest payments) of 1.2 per cent of GDP
this year and 2 per cent in 2016. This year s surplus is likely
to be little better than half what he promised, said Mansueto
Almeida, a public finance expert.
That may be enough to satisfy credit raters. The policy
shift under Levy has been bigger than expected, said Lisa
Schineller of Standard & Poor s.
Financial watchdogs are equally impressed with Alexandre
Tombini, the Central Bank s governor, who has not allowed
the threat of recession to deter him from fighting inflation,
currently more than eight per cent. On June 3, the central
bank raised interest rates by half a per centage point, to
13.75 per cent. Tombini s goal is to bring inflation down to
4.5 per cent, the midpoint of the bank s target range, by
next year. That may require further interest rate hikes.
In the short term, the diligence of Levy and Tombini will
further empty São Paulo s restaurants. The economy is even
weaker than it looks at first sight. Investment, already low
by the standards of emerging economies, dropped for the
seventh quarter in a row in the first three months of 2015.
Household consumption fell for the first time year on year
since Rousseff s left-wing Workers Party came to power
Without a reduction in imports, the annual decline in
the economy would have been even bigger. Levy has made
most of his savings by raising taxes, which will depress
today s growth, and by slashing investment, which will
hold back tomorrow s.
Restoring credibility is not enough. Brazil must also get
rid of "supply-side bottlenecks," said Christine Lagarde,
chief of the International Monetary Fund, who visited Brazil
in May. These bottlenecks include an enterprise-crushing
tax system, inadequate infrastructure and antiquated labor
laws. Brazil s new managers have barely begun to deal with
@2015 The Economist Newspaper Ltd. Distributed by
the New York Times Syndicate
Mexico, Brazil and the
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