November 24, 2010 / 9:10 PM / 9 years ago

UPDATE 5-Brazil's new economic team vows deep spending cuts

* Mantega vows spending cuts to help lift economy

* Finance minister says cuts could surpass 20 bln reais

* Central bank nominee sees full autonomy on rates

* Explicit vow for fiscal control surprises markets (Adds details from Mantega on budget cuts, BNDES transfers)

By Maria Carolina Marcello and Ana Nicolaci da Costa

BRASILIA, Nov 24 (Reuters) - Brazil’s incoming economic policy team surprised financial markets by promising deep cuts to budget spending on Wednesday, moving to shore up the main weakness in the country’s booming economy.

In his first public statements since President-elect Dilma Rousseff confirmed he would stay in his post, Finance Minister Guido Mantega said a recent burst in spending was no longer necessary since the global financial crisis had eased.

“Now is the time to reduce the government’s spending,” Mantega said at a news conference in the capital. “It’s necessary to make an effort so that ... the country’s sustainable growth can continue.”

Mantega later told Reuters that the budget cuts could surpass 20 billion reais ($11.6 billion) in 2011, saying that Rousseff had asked for a “heavy hand” to rein in spending, which soared in the run-up to October’s presidential election.

“This fiscal agenda is not short-term. It’s a long-term philosophy,” Mantega said at the Reuters Brazil Investment Summit in Brasilia. [ID:nN24237774]

The explicit recognition of Brazil's recent fiscal slippage -- which has placed upward pressure on interest rates and, by extension, the Brazilian currency BRBYBRL= -- capped a largely positive day for markets that included the nomination of Alexandre Tombini, a well-regarded technocrat, to head the central bank.

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Brazil's key interest rate: r.reuters.com/bem26q

Key facts about Brazil’s economy: [ID:nN19135426]

Political risks in Brazil: [ID:nRISKBR]

Profile of central bank nominee: [ID:nN23137506]

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A formal statement confirming their appointments was accompanied by a pledge from Rousseff, who will take office on Jan. 1, to maintain the prudent economic policies that have made Brazil one of the world’s hottest emerging markets under current President Luiz Inacio Lula da Silva.

The message of fiscal restraint came with assurances that the central bank would remain independent to set monetary policy without political interference. That went over well with markets, helping to push up stocks in Sao Paulo to a session high on a day when yields on interest-rate futures fell on optimism about the new economic team.

Still, investors will be keeping close tabs to see if Rousseff’s top policymakers live up to their promises.

“At the rhetorical level, that’s what the market wants to hear,” said Alberto Ramos, senior economist at Goldman Sachs in New York.

“(Mantega) can talk the talk now, but he has to walk the walk. Those are very nice statements, but the recent measures that we have seen do not necessarily go in that direction.”

Tombini, who first joined the central bank since 1995 and is currently in charge of financial regulation, immediately addressed investors’ main concern — that Rousseff might rein in the bank’s de facto autonomy and pressure him to achieve her professed goal of lowering interest rates.

“I have had long and good conversations with (Rousseff) and she said that within this regime, there is no middle ground, it’s full operational autonomy,” Tombini said.

FISCAL CONSOLIDATION COMING

Mantega’s profile in some international circles has grown recently, particularly after he was the first major leader to speak of a “currency war.” The phrase is now ubiquitous in discussions of exchange-rate tensions between the United States, China, Brazil and other nations.

The primary stain on Mantega’s record was the election-year surge in spending that has placed some of Brazil’s fiscal targets in doubt. But, using explicitly clear language, he seemed eager to draw a line under the recent slippage and vowed spending cuts next year.

“2011 will be a year of fiscal consolidation,” Mantega said, telling Reuters that state development bank BNDES would receive about 50 billion reais less next year from the Treasury. He also urged legislators to keep the minimum wage at reasonable levels and said Rousseff would prioritize tax reform early next year in an effort to improve Brazil’s often maddening business climate.

Tombini’s relative lack of political experience and charisma — even supporters describe him as somewhat soft-spoken and introverted — could make him susceptible to political pressure to lower rates, some analysts have said.

However, Tombini received an unexpected vote of confidence from former Brazilian President Fernando Henrique Cardoso, who led the country from 1995-2002. Cardoso, of the opposition PSDB party, said Tombini was instrumental in helping devise an inflation-targeting scheme during a 1999 financial crisis.

“I remember he helped us with a lot of problems,” Cardoso told Reuters. “He’s a discreet, very competent technocrat.”

Miriam Belchior, who currently oversees the government’s flagship infrastructure investment program, will take over the planning ministry. She also emphasized austerity in her statements, saying the next government would examine current expenditures for opportunities to make cuts.

Tombini, whose appointment still has to be approved by Congress, will be thrust into the spotlight at a time of mounting concerns about inflation.

The central bank’s next monetary policy meeting is set for Dec. 7-8, and analysts expect he will play a major role even though his respected predecessor, Henrique Meirelles, will still be formally in charge.

A recent spurt in inflation has placed renewed pressure on the bank to raise the benchmark Selic rate, which currently stands at 10.75 percent, among the highest in the world. ($1=1.723 reais) (Additional reporting by Luciana Lopez, Writing and additional reporting by Brian Winter; Editing by Todd Benson, Kenneth Barry and Jan Paschal)

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