SCENARIOS-Potential Brazil economic posts under Rousseff

BRASILIA, Nov 10 (Reuters) - As Brazil’s President-elect Dilma Rousseff gets ready to take the helm of Latin America’s largest economy on New Year’s day, speculation is rife about who she will pick for finance minister and central bank chief.

The choices for those key posts will set the tone for her government’s economic policy, and investors are looking for reassurances her administration will rein in spending after a sharp deterioration in fiscal accounts in 2010.

So far, Rousseff has given mixed signals about her commitment to curbing public spending, insisting she won’t stray from fiscal discipline but also suggesting that aggressive spending cuts aren’t needed.

Runaway spending risks stoking inflation, increasing pressure on the central bank to raise interest rates, which at 10.75 percent are already among the world’s highest. For details on each contender, see [ID:nN31244605]

The following are some possible scenarios:


A real possibility. If Mantega, 61, stays on as Rousseff’s finance minister, investors would likely interpret it as a sign that expansive public spending will continue.

Mantega, a close lieutenant of President Luiz Inacio Lula da Silva, has presided over Brazil’s biggest economic boom in three decades and has helped boost the country’s profile on the global stage in groupings like the Group of 20 and the BRIC club of fast-growing emerging economies.

But on his watch public finances have come under severe strain, raising doubts about his commitment to fiscal restraint. The government has resorted to what many economists have called “creative accounting” to meet its budget surplus target. Some say Mantega has lost credibility in the process.


A real possibility. Coutinho, a 64-year-old economist who was once Rousseff’s professor, would likely be well received by markets. Although he presided over a surge in state-subsidized loans in his tenure at national development bank BNDES, he is seen as more fiscally conservative than Mantega.

He says pending has been rising too quickly and has stressed the importance of boosting the domestic savings rate. Coutinho has also voiced concern about the effect of the strong real BRBYBRL= on Brazilian industry and could advocate more restrictions on capital inflows if the currency keeps rising.

Like Rousseff, Coutinho is a firm believer in state-led industrial policy. As such, some analysts wonder if he’d be able to rein in expenditures in a political climate where the government is viewed as a key player in economic development.

Coutinho has said he would like to stay at the BNDES but is not expected to decline a cabinet post if offered one.


Less likely. A rising star and top adviser to Mantega, the upgrade of the secretary of economy policy to finance minister would also likely be well received by investors.

Barbosa, 40, helped draw up some of the Lula administration’s flagship infrastructure programs and was integral in orchestrating the stimulus measures that steered Brazil through the global financial crisis.

A policy wonk who has won Rousseff’s respect, Barbosa is seen as a pragmatist who is willing to change tack when economic conditions merit.

“The market thinks that whether it be Coutinho or Barbosa, there could be a change in fiscal policy, because both are considered to be senior economists that understand the link between fiscal policy and economic growth,” said Roberto Padovani, chief Brazil economist at WestLB in Sao Paulo.


A long shot. Bernardo has been floated for a series of positions as a result of his eclectic background, from congressman to executive at state-owned Banco do Brasil BBAS3.SA. He has also been tipped as a potential chief of staff to Rousseff.

As planning minister, Bernardo, 58, has earned a reputation as a pragmatic technocrat with noteworthy political skills. In the pecking order of Lula’s economic team, Bernardo often has to fall in line with Mantega but has nonetheless emerged as an influential policymaker.

Viewed as an underdog for the finance ministry, Bernardo recently advocated pursuing a lower inflation target as a way of gradually forcing down interest rates.


A real possibility. According to Brazilian media reports, Meirelles could stay on as central bank president in the first few months of Rousseff’s government to reassure markets. After that, he could be replaced by Alexandre Tombini, currently the head of financial regulation at the bank.

A central bank civil servant, Tombini was one of the architects of Brazil’s inflation targeting regime, which was adopted in 1999 and helped usher in the price stability and economic boom of recent years.

Tombini, 46, is not expected to stray from the conservative monetary policies of the Meirelles years, which have been marked by relatively low inflation and robust economic growth. Central bank insiders say Tombini is unlikely to bend to political pressure when setting monetary policy.


Less likely. Coutinho has also been tipped to take the helm of the central bank. A nomination of an “outsider” to run the central bank would likely be met with apprehension from investors, who worry about political meddling in monetary policy.

With inflation hovering above the center of the government’s target range, economists say the central bank will have to take the politically unpopular decision of raising interest rates in Rousseff’s first year in office. Some worry that Coutinho might be less inclined to do so.

Brown Brothers Harriman said in a research note that Coutinho’s appointment to the central bank “would be very problematic as monetary policy would get more politicized.”

In this scenario, “I think he would be the right guy for the wrong job,” said Tony Volpon, head of emerging market research for the Americas at Nomura Securities in New York.


A long shot. Barbosa’s name has also been floated for the central bank, an appointment that would likely cause unease in markets.

Although Barbosa is a respected economist and policymaker, his role at the finance ministry has occasionally put him at odds with the central bank under Meirelles. Under Mantega, the finance ministry has also appeared politicized at times, fueling concerns that Barbosa could be vulnerable to political pressure if he headed up the central bank.

Barbosa has argued that real interest rates in Brazil could safely fall to 2 percent in the next four years without putting the economy at risk. Real interest rates, or the central bank’s base rate minus inflation, currently hover above 6 percent. (Additional Reporting by Bruno Peres; Editing by Todd Benson)