Brazil’s Levy looks beyond austerity to shore up economy

By Caio Saad and Alonso Soto

RIO DE JANEIRO/BRASILIA (Reuters) – The Brazilian government is looking beyond fiscal austerity to avoid a recession, Finance Minister Joaquim Levy said on Friday, signaling what could be a new phase in the administration’s strategy to pull the economy out of its lull.

Speaking to business leaders in Rio de Janeiro, Levy said the government plans to announce an agricultural stimulus plan and an extensive infrastructure program to lure much-needed capital into the economy.

That pro-growth agenda was unfurled on the same day as data showing the economy contracted in the first quarter, setting the stage for what many think will be the country’s worst recession in 25 years.

Without softening his message of austerity, Levy said the government is taking important measures to revive the once-booming economy.

“There is plenty to be done. We have already started and have seen some results,” said Levy, adding the second quarter will be one of transition.

Picked by President Dilma Rousseff to undo many of the policy missteps threatening Brazil’s investment-grade rating, Levy is seen as a strict manager determined to rebalance the public accounts at any cost.

Some lawmakers of Rousseff’s own Workers Party blame Levy’s orthodox policies for sinking the economy further into recession, and some have called on the former banking executive to quit.

Despite such resistance, Levy succeeded this week in passing through Congress austerity measures limiting some of the world’s most generous pension and unemployment benefits.

As the public faces the unpopular austerity push Levy is under pressure to explain how he can recapture some of the dynamism that made the Brazilian economy boom of the last decade.

“Levy first acted as a fireman to put out the fiscal fire,” said Juan Jensen, chief economist with consultancy Tendencias. “Although the job is not done on the fiscal side he is signaling that there are other things he can do get the economy going.”

After initial skepticism, the central bank decided on Thursday to free up a 25 billion reais stimulus to housing and agribusiness sectors. To quell the inflationary impact of the stimulus, the bank also opted for measures to mop up liquidity.

Levy said the mortgage financing model based on the country’s national savings is reaching its limits and the government should start considering other options.

He also said the government is ready to pursue more structural tax reforms to bolster productivity.

“We are getting ready for new growth cycles,” Levy said.

(Writing by Alonso Soto; Editing by Chizu Nomiyama)