Insight: Invigorated Rousseff shifts focus to 'Brazil cost'

NEW DELHI Mon Apr 2, 2012 11:22am EDT

Brazil's President Dilma Rousseff poses in front of the historic Taj Mahal in the northern Indian city of Agra March 31, 2012. REUTERS/Stringer

Brazil's President Dilma Rousseff poses in front of the historic Taj Mahal in the northern Indian city of Agra March 31, 2012.

Credit: Reuters/Stringer

NEW DELHI (Reuters) - Standing before reporters on a trip to India last week, Brazil's generally stern President Dilma Rousseff flashed a wry smile, admitted to jet lag and said: "If I take a nap right here, cut me some slack, OK?"

Humor is not the only new quality she's displaying lately.

After taking office on the crest of an economic boom that allowed an unhurried approach to reforms, Rousseff is starting to take bold steps to cut Brazil's notoriously high business costs and taxes, driven by what advisers describe as a new sense of urgency to revive a stagnating economy.

Brazil's economy grew a disappointing 2.7 percent last year after expanding at a brisk 7.5 percent pace in 2010.

Rousseff said she would unveil a new stimulus package "as soon as I return to Brazil." Government sources, speaking on condition of anonymity, said the measures would include a mix of tax incentives, payroll tax cuts for key industries and higher tariffs in sectors where imports are gaining market share.

State development bank BNDES will also expand a subsidized loan program to more industries, offering lower interest rates and longer payment terms to stoke investment, newspaper O Estado de S.Paulo reported on Monday. In all, the bank is planning an additional 18 billion reais ($9.9 billion) in subsidized loans, Estado said, citing unnamed government sources.

Rousseff is expected to announce the measures on Tuesday.

Trade Minister Fernando Pimentel, who joined Rousseff on her trip, told Reuters in New Delhi the government also aims to dramatically slash the red tape faced by importers and exporters by creating a "single window" system - which will allow companies to process paperwork in one place, instead of up to 17 different state bodies at present.

Taken together, these steps likely won't be bold enough to please business leaders who complain about the so-called "Brazil cost" - the taxes, bureaucracy and infrastructure bottlenecks that have made Brazil one of the world's most expensive places to do business, and contributed to slowing economic growth.

Still, the measures mark an important strategic shift for Rousseff, who took office in January 2011 believing she would be a caretaker for an economy that has boomed in past years. The unexpected slump, which nearly saw Brazil tip into recession late last year, now appears to be stirring her government into a more reformist role, with more changes to come.

A MORE ACTIVIST APPROACH

"We have much work to do," Pimentel said in an interview. "Brazil's growth has produced many inefficiencies, and ... you'll see us becoming more active in the coming period."

Rousseff herself referenced the change in a news conference on Thursday following the BRICS summit in New Delhi, which brought together leaders from Brazil, Russia, India, China and South Africa. When pressed on why she hadn't been more active earlier in her term, she said circumstances had simply changed.

"Look, a government isn't made on the second or third day," she replied. "It's made over time. Things mature."

To be sure, Rousseff is not about to transform herself into a Brazilian Margaret Thatcher. Rousseff's gruff demeanor has drawn comparisons to the former British prime minister, but she has not previously demonstrated Thatcher's reformist zeal.

Rousseff and her left-leaning Workers' Party will not support any changes to the labor code, which grants workers European-style rights to pensions and indemnizations if they are fired. Her poor relationship with Congress, where legislators are upset with her for cutting funds for their pork-barrel projects, will limit the scope of any other legislation.

Rousseff referred to those tensions when asked why she won't push for an omnibus tax reform, which has long been a holy grail for Brazilian business leaders.

"I'm fully aware that Brazil needs to reduce its tax burden," she said. "What I have done is taken little measures that, in their totality, create greater tax exemptions, which is fundamental for the country to grow."

"Would it be better to do a broad reform? It would. But it depends on what country you live in," she said, citing entrenched "interests" that make tax changes difficult.

Rousseff's incremental approach to policy has earned her criticism from opposition leaders and Wall Street analysts, but it has quietly produced results in certain areas.

The best example may be her management of Brazil's currency, which became overvalued in recent years as foreign capital poured into the country. Rousseff's government has over the past year introduced a seemingly never-ending series of tweaks to taxes on foreign loans and other financial transactions to arrest the currency's gains.

Six months ago, Rousseff's efforts earned near-unanimous derision from economists and traders who said she could not possibly stand in the way of billions of dollars in inflows. But the real has depreciated more than 15 percent since hitting a 12-year high in August, and has underperformed other Latin American currencies over the past two months as the government continues to pass new piecemeal controls.

LULA'S RETURN COULD BE A BOOST

Rousseff has several other factors working in her favor. The logjam in Congress has shown signs of coming unstuck, with the Senate finally approving a change last week to the pension code critical to Brazil's future solvency.

The Eurasia Group, a political risk consultancy, called it "Rousseff's first structural reform."

Luiz Inacio Lula da Silva, Rousseff's wildly popular predecessor and her political mentor, has recovered from throat cancer and is likely to return to politics after being sidelined in recent months. Lula's role is an informal one, but he remains extremely influential, excelling at the back-slapping and deal-making in Congress that Rousseff has struggled to emulate.

Meanwhile, Rousseff's popularity rating has defied the economic slowdown, hovering near the 70 percent mark. Her advisers say she is consciously taking steps to burnish that asset - giving a rare two-hour interview last week to a Brazilian magazine that has been critical of her government - in hopes of cashing in the political capital going forward.

Rousseff has, above all, become notably more active in seeking out business leaders in an effort to coax them into making greater investments. Her meeting with a group of about 20 Brazilian business leaders in New Delhi ran almost an hour longer than expected.

There, too, her invigorated demeanor appears to have turned heads. A statement from an industry group that has been critical of Rousseff described her as "relaxed and good-humored," and expressed hopes for similar meetings on future trips.

(Editing by Todd Benson and Todd Eastham)

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