January 3, 2011 / 4:38 PM / in 7 years

Brazil's Rousseff quickly tackles spending

SAO PAULO (Reuters) - President Dilma Rousseff’s new government moved immediately on Monday to tackle the biggest threats to Brazil’s booming economy, vowing new budget cuts, measures to deal with an overvalued currency, and even a tougher line in trade talks with China.

The first business day in office for Rousseff, 63, signaled a clearly market-friendly tone, as the pragmatic leftist knows she’ll need Wall Street’s support -- and money -- to make good on her ambitious goals of ending extreme poverty and expanding Brazil’s woeful infrastructure in the next four years.

Planning Minister Miriam Belchior said Rousseff would “listen carefully to the market’s concerns” and make necessary cuts to rein in a burst of government spending that has fueled a potentially dangerous rise in inflation.

In a clear departure from her popular mentor and predecessor Luiz Inacio Lula da Silva, Rousseff will also raise concerns about China’s undervalued currency and trade protectionism when she visits the Asian giant in April.

Lula had been hesitant to broach the topic, in part because of China’s growing importance as a buyer of Brazilian commodities. Yet the relentless appreciation of the Brazilian real, which is the world’s most overvalued currency by some measures, has punished local factories and increased pressure on Rousseff to find a solution.

“This is a subject that speaks not just to Brazil but to all emerging markets,” Trade and Industry Minister Fernando Pimentel told reporters in Brasilia.

Sources close to Rousseff’s government told Reuters last week that she is planning aggressive measures such as targeted tariff increases, including on imports from China, and tax breaks to aid local industry.

Despite the workmanlike emphasis on the tasks at hand, ceremonies in the capital on Monday were also marked by a perceptible euphoria surrounding an economy that will slow down in 2011, but still outpace most of the rest of the world.

The current mood was perhaps best captured by her new science and technology minister, Aloizio Mercadante, who said that Brazil could soon become “the world’s first developed tropical country.”

MARKETS REACT FAVORABLY

Brazilian markets posted solid gains in their first session since Rousseff took office, with the Bovespa stock index up about 1.5 percent in afternoon trade.

The real also gained about 1 percent and pierced the psychologically important threshold of 1.65 per dollar -- a sign of market stability, to be sure, but one that will increase pressure on Rousseff to find a way to stop the gains.

Economists agree the best way to water down the real’s value over time is to cut government spending, and end a years-long pattern that has seen loose fiscal policy and high interest rates coexist in Brazil, with ensuing economic distortions.

Belchior told reporters the exact size of budget cuts would be decided sometime this month, although Brazilian media said on Monday the total could reach 25 billion reais ($15 billion), slightly more than most investors had expected.

Meanwhile, new Central Bank President Alexandre Tombini signaled that he will act to stop a recent surge in consumer prices, declaring at his swearing-in that Brazil should look to lower its inflation target over time.

In a decision that could herald a greater-than-expected reliance on private capital to solve Brazil’s many infrastructure shortcomings, Rousseff will turn to private companies to build a new terminal at Sao Paulo’s main international airport, Folha de S.Paulo newspaper reported.

Brazil’s woefully under-equipped ports and schools are widely seen as the biggest medium-term threat to an economy that is expected to cool down in 2011, but still forecast to grow between 4 and 5 percent.

Airports are currently run by state agency Infraero, which has failed to keep pace with booming passenger demand as millions of Brazilians join the middle class.

Rousseff also plans an initial public offering for Infraero, Folha reported, citing unnamed advisers.

Both decisions are surprising because Rousseff repeatedly slammed previous governments’ privatization plans during her presidential campaign. News of the apparent about-face, and its timing, are likely intended as a sign to investors that Rousseff will tack toward the more business-friendly wing of her party during her administration’s early days.

A Rousseff spokesman declined comment on the report.

(Additional reporting by Raymond Colitt, Isabel Versiani and Leonardo Goy in Brasilia, Editing by Todd Benson and Kieran Murray)

$1 = 1.66 reais

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