Exclusive: Brazil's Temer to overhaul economy, central bank to rescue confidence

BRASILIA (Reuters) - The board of Brazil’s central bank would be replaced as part of a drive to overhaul management of the economy and adopt sweeping reforms to regain investor confidence in a possible government of Vice President Michel Temer, three people familiar with the plan told Reuters.

Brazil's Vice President Michel Temer arrives at the Planalto Palace in Brasilia, Brazil April 22, 2016. REUTERS/Ueslei Marcelino

With President Dilma Rousseff likely to be suspended by the Senate by mid-May for allegedly breaking budget laws, Temer is already drafting an ambitious program to pull Latin America’s largest economy out of its worst crisis in a century.

Temer, a constitutional lawyer by profession, is gearing up to push through unpopular tax, pension and labor reforms and is tapping high-profile economists for the Herculean task of regaining confidence in the once high-flying economy.

One of the most pressing demands from investors is an overhaul of the central bank’s eight-member board, known as Copom, that has been accused of being susceptible to political pressure to bolster economic activity at the cost of high inflation.

Wellington Moreira Franco, one of Temer’s main economic advisers, told Reuters the bank’s board and that of other state-run lenders will be replaced, but their new leadership will be picked by the next finance minister.

In an interview with daily O Globo, Temer said that former central bank chief, Henrique Meirelles, would be his pick for the Finance Ministry if he takes over the presidency.

That could happen as soon as May 12 as the Senate on Tuesday set up a committee to recommend to the full chamber whether to put Rousseff on trial, at which point she would effectively be suspended from office.

In a fiery speech on Tuesday, Rousseff attacked Temer and his Brazilian Democratic Movement Party (PMDB) for conspiring to oust her in what she calls an illegal “coup d’etat.”

Still, the leftist economist has failed to muster support from Brazilians, a majority of whom blame her interventionist policies for sinking the economy into a deep recession that has left nearly 2 million people unemployed.

Rousseff was harshly criticized by markets for apparently strongarming the central bank into slashing interest rates during her first term even when inflation was above the official target.

“The central bank board needs to be replaced. To regain confidence, it is crucial that we bring people from the market who are not susceptible to political meddling,” said a source who is part of Temer’s inner circle of advisers.

The central bank, under the leadership of Alexandre Tombini since 2011, started on Tuesday a two-day meeting to decide on its benchmark Selic interest rate.

The bank’s board, which is made up mostly of career technocrats with little experience in the private sector, is expected to keep the Selic on hold for the sixth straight time.

The candidates for the new board includes Itau chief economist Ilan Goldfajn, former treasury chief Carlos Kawall and former central bankers Mario Mesquita and Luiz Fernando Figueiredo, as well as Goldman Sachs executive Paulo Leme, the sources said. Mesquita, Goldfajn and Kawall declined to comment while Figueiredo and Leme did not answer emails from Reuters.

Temer plans to send Congress bills to limit costly pension benefits, make the rigid labor market flexible and simplify the country’s tax system, the three sources said, declining to be named because they were not allowed to speak publicly.

As part of the economic overhaul Temer will also slash the number of ministries to less than 25 from 31 currently and reduce current costs by firing of thousands of public jobs, one of the sources said.

“The country is broken and we need to fix it right away,” the source said. “We can’t wait, we need to move fast.”

Additional reporting by Anthony Boadle, wWriting by Alonso Soto; editing by Cynthia Osterman