| SAO PAULO
SAO PAULO Jan 23 Pacific Investment Management
Co, the world's largest bond fund, urged Brazil to rethink its
current economic policies and restore credibility on public
finances, the latest sign that foreign investors are growing
worried over the outlook for Latin America's largest economy.
Policymakers in Brazil need to work on a plan to lure
investment, revive confidence and spur growth with moderate
inflation, Michael Gomez, co-head of emerging markets, said in a
letter to investors published on the fund's website on Thursday.
Pimco, as the Newport Beach, California-based bond giant is
known, oversees about $1.97 trillion in assets.
The letter marks the most radical change of tone from Pimco
since at least 2002, when Mohamed El-Erian, who back then
managed $15 billion in emerging markets bonds for Pimco, said
the election of former union leader Luiz Inácio Lula da Silva as
president would not trigger a crisis in the country. On Tuesday,
El-Erian resigned as Pimco's chief executive and co-chief
Gomez said the investing climate in the country last year
was characterized "by anything but order and progress," in
reference to the motto emblazoned on Brazil's flag. Standard and
Poor's decision to put Brazil's ratings on negative outlook for
a downgrade raised alarm bells over the state of the
government's finances, he added.
"Brazil needs to anchor economic policy around a stringent
and credible primary surplus target rather than run the current
mix of loose fiscal policy, subsidized public credit and ever
tighter monetary policy," Gomez said in the letter. "Yet, things
could improve from here, if policymakers rethink their remedies
for Brazil's challenges."
His remarks come as higher borrowing costs and a
presidential election, alongside the removal of monetary
stimulus in the United States, are making investors skittish
about Brazil. Some $12.3 billion left the country last year, the
biggest outflow since 2002 - when global turmoil and a tense
presidential ballot fanned fears of a debt default.
Pimco and banks including HSBC Securities and Citigroup
Global Markets Inc are concerned that last year's market decline
in Brazil could extend into 2014 if macroeconomic imbalances
deepen, political noise on the way to elections increase and
global market turmoil rattles investor confidence.
In 2013, the potential withdrawal of monetary stimulus in
the United States and a deterioration in Brazil's fiscal
position hurt markets. The October vote, in which President
Dilma Rousseff is expected to run for re-election, is a worry to
investors. Polls showed that she would beat any challenger if
the elections were held now.
Over the past decade, and encouraged by El-Erian's
successful bet on Brazil, investors poured hundreds of billions
of dollars into the country. But many of them are now leaving.
Under Rousseff, some investors say, policy implementation
was erratic, imbalances in the country's external sectors
worsened, and state meddling in the private economy triggered
steep investment losses.
"The policy mix that has eroded confidence, distorted the
local interest rate market, undermined the currency and injected
credit risk premium into sovereign assets is readily fixable,"
Faced with a changing and tougher external backdrop led by a
cooling Chinese economy, weak commodity prices and a potential
rise in global borrowing costs, policymakers in Brazil failed to
appropriately adjust their policies to restore confidence and
lure sufficient investment, Gomez said.
Yields on local government notes surged an average 3.6
percentage points last year, while the benchmark Bovespa stock
index, calculated in U.S. dollars, shed 30 percent in
the past 12 months.
"Valuations are attractive, but unless an effective policy
mix is restored, the outlook for order in Brazil's financial
markets is less certain," Gomez noted.
Gomez said, however, that Brazil has a number of attributes
- including a healthy demographic profile and abundant natural
resources wealth - that support "the potential to generate
strong economic growth and lower inflation."
Low foreign currency-denominated debt and large foreign
reserves, as well as a floating exchange rate, should act as
insurance for the country, Pimco said.