SÃO PAULO — Joaquim Levy stepped down as Brazil’s finance minister on Friday evening, ending months of speculation over his role. He was replaced by former planning minister Nelson Barbosa, who is seen as closer to leftist President Dilma Rousseff.
Levy was a proponent of tough fiscal measures which he backed to lift Brazil out of the worst recession it has experienced in 25 years.
His appointment and fiscal adjustment plans had been warmly welcomed by the markets, and was widely seen as an attempt by the government to draw greater confidence in the Brazilian economy from investors.
But Levy was not happy in the role: he said he felt regularly sidelined and distant from the president’s inner circle of confidants. Rousseff has not given a reason for changing the head of her economic team.
The new minister, Nelson Barbosa, has vowed to continue the work on the fiscal adjustments, begun by Levy, although signalled a less swingeing approach would be taken:
“Today our greatest challenge is one that is fiscal, the solution to which depends solely on the Brazilian government … Only with fiscal stability will we have sustainable growth,” Barbosa was quoted by local media as saying.
Following his departure, Levy said he was confident the economy would return to growth: “Time will show that we will reap the results of everything that has been done this year, putting the Brazilian economy back on track.”
A Chicago University-trained economist, Levy was regularly at loggerheads with anti-austerity elements of Rousseff’s Workers’ Party (PT) during his time at the head of the finance ministry. Levy urged a more drastic plan to bring the economy back into the black through cuts to public spendings and new taxation were continually at log.
Although the president publicly backed the former minister, the relationship never looked close, and Levy’s exit has been touted as a victory for Rousseff’s predecessor, Luiz Inácio Lula da Silva.
The former PT president has made his feelings on Levy’s austerity plans, which were seen by some as a threat to social progress made over the past 15 years, quite plainly known.
It appears the final two straws that broke the finance minister’s back and precipitated his departure were Brazil’s second downgrading by a major credit rating agency and the government’s slashing of the former minister’s fiscal surplus target for the country in 2016.
The finance ministry announced the change at the helm, long predicted by local media, as markets were closing on Friday. The fact that an announcement was imminent was made clear as Levy was seen to have bid farewell to the National Monetary Council (CMN) on Thursday in a swan song speech.
As the news broke, Brazil’s currency slumped to 3.98 reais against the US dollar – levels not seen since September – and the Ibovespa benchmark index closed down around 3 percent.
Analysts expect markets to react even worse as fears settle in that Barbosa’s appointment could signal a return to populist fiscal policy that will play well with the government’s supporters.
The Brazilian economy is set to recede by over 3.6 percent this year, according to the latest central bank poll of over 100 economists, and 2.67 percent next year, in the deepest and longest recession in a generation.
Inflation has already officially hit 10 percent, and economists believe it will end 2015 at 10.61 percent, before dropping to 6.8 percent in 2016.