April 27, 2020 / 3:31 PM / a month ago

Brazil's Bolsonaro backs Guedes to calm jittery markets

BRASILIA (Reuters) - Brazil’s President Jair Bolsonaro voiced his support for Economy Minister Paulo Guedes on Monday, seeking to quell concerns about the future of his remaining ‘super minister’ and the growing political and economic crises during the coronavirus pandemic.

FILE PHOTO: Brazil's President Jair Bolsonaro speaks near Brazil's Economy Minister Paulo Guedes while leaving Alvorada Palace in Brasilia, Brazil April 27, 2020. REUTERS/Ueslei Marcelino/File Photo

Flanked by Guedes and central bank chief Roberto Campos Neto in Brasilia, Bolsonaro said Guedes had full control over economic policy and stressed that the government remains acutely concerned with the rise in public spending.

The display of a united policy front follows the resignation on Friday of Bolsonaro’s other civilian ‘super minister,’ the popular Justice Minister Sergio Moro, which sent financial markets into a tailspin.

Speculation over Guedes’ future intensified after he was nowhere to be seen at last week’s unveiling of a “Pro-Brazil” plan for infrastructure investment backed by a growing contingent of army generals in Bolsonaro’s cabinet.

Guedes said on Monday that major public spending programs are a thing of the past and insisted that the government will not tamper with a spending ceiling limiting growth in public expenditure to the previous year’s rate of inflation.

“Why talk about knocking down the roof if the roof protects us in the storm?” Guedes said, adding that the government would return to its economic reform agenda later this year.

Stocks rose 3% after Friday’s heavy beating, and the exchange rate pulled back from an all-time low as the central bank intervened again in the currency market with the sale of $600 million.

On Friday the central bank sold over $3 billion in one of its most active days of intervention this year, as Moro’s resignation sparked huge volatility.

“The united front looks like an effort at damage control or at least to alleviate fears about a resignation of Guedes and keep markets on side,” said William Jackson, chief emerging market economist at Capital Economics.

“But I think markets will need to see more from the president to quash these rumors,” he said.

Guedes and Campos Neto both stressed the need to maintain fiscal discipline even as a surge in crisis-fighting spending is set to blow the government’s primary budget deficit to record levels of around 6% or more of gross domestic product.

The economy is expected to shrink 3.3% this year, a weekly central bank survey of economists showed on Monday, while the World Bank and International Monetary Fund said it would contract 5% or more.

Economists at Citi on Monday slashed their 2020 GDP forecast to -4.5% from -1.7%, which they say would be “the worst annual contraction ever.” Central bank figures going back to 1962 show the biggest economic crash was a 4.25% contraction in 1981.

Reporting by Lisandra Paraguassu and Jamie McGeever; Editing by Louise Heavens and Richard Chang

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