Following is the transcript of a CNBC interview with Henrique Meirelles, Finance Minister of Brazil. The interview was broadcast on CNBC on 20 April 2017.
All references must be sourced to a "CNBC Interview".
Interviewed by Geoff Cutmore, Anchor, CNBC at IMF Spring Meeting 2017.
Geoff Cutmore: Let's start with the big picture Minister. To what extent are you concerned or optimistic about the global growth outlook from here?
Henrique Meirelles: I think it's a balance scenario that probably tilts toward the positive. In that sense the global outlook at this point, at this point is a good one. I don't see crisis looming ahead or any kind of big problem at least for a while.
GC: What about the headwinds that we see economists worry about like Donald Trump and protectionism or Chinese debt and excessive leverage in the corporate sector in that economy? Do any of these things keep you awake?
HM: Well there's a leveraging question in China is something which dates already for several years. And economists were expecting to have some hard landing or something of that sort. Maybe three, four or five years ago. That didn't happen. And the Chinese apparently are controlling that process and it's somewhat difficult to understand exactly how that is going to proceed from the outside. But my assumption is that with all we will not be seeing something along the lines of a hard landing in China some more so. And on the other hand this question protectionism with Trump. That remains to be seen. We have to watch exactly what kind of specific measures he could take and how problematic that would be. What I am saying is that on the other hand in general our economies are recovering, emerging markets are recovering. I think that we are going into the right direction.
GC: In the recent past some economists have said that Brazil could be a beneficiary of sanctions against Mexico. Do you feel that if Trump targets Mexico, specifically protectionist tariffs, that Brazil may win?
HM: Well I think for us it's kind of neutral because we are unfortunately one of, one of those countries that have a very large surplus to the U.S, particularly with manufactured goods. We have a very well diversified portfolio of exports. I don't see that as a big problem or you have a good amount of raw material and commodities and etc., and also some manufactured goods. I think that from a Brazilian point of view, I don't think there is a big change. We are not targeting specifically one thing or another. We simply think that free trade is better for everyone involved.
GC: Obviously we're all looking at the Federal Reserve as well trying to understand what the impact on the global economy would be if two or three interest rate hikes this year. Again it's not something that you are very focused on. Could that potentially slow growth?
HM: No I think that that's already priced in. And that's already in the cards. I think the Fed is announcing their next steps already. For a while I don't see any surprise coming along when we see all these estimates about the Brazilian economy for this year and next year and etc., that is already in the price.
GC: The meat scandal has obviously been disturbing for those customers of Brazilian meat. It does appear that we are through the worst of the scandal here. But are you worried that the legacy of that will have a lasting impact on sales?
HM: Well I would think that that's a question of clarification. I think that there was a tremendous amount of understanding about the target of that investigation was specifically some wrongdoing on the part of some inspectors of their cultural ministry etc. Some accusations that they were not conducting their job properly evidently. That has to be judged and decided by the court system. And having said that, the number of plants which face some sanction was very small in the country. Only one in 4,800 or so was really a target of closer and more serious sanctions. In summary, I think the question now is one of the producers working towards assuring everyone that the quality is good enough that the inspections will be made and quality is going to be analyzed which is fair which is I think good for everyone involved at the end of the day.
GC: But food safety in particular in Asia is a key challenge and I do wonder whether it will affect long term investment FDI from Asia into the Brazilian economy because they are concerned about product safety.
HM: Well, we are not seeing that. I think foreign direct investment is growing in Brazil. We see a very strong flow. And the foreign direct investment is not necessarily directed towards meat production which is basically in Brazil dominated by Brazilian owned companies. That specifically area. And in other food segments I don't see that happening as well. At the end…And foreign direct investment in Brazil is pretty well diversified and particularly in other areas of manufacturing. I don't see that as a significant problem for foreign direct investment into Brazil.
GC: Do you eat Brazilian beef? There is no reason for anybody watching this interview to be worried about the quality of Brazilian beef.
HM: No I don't worry about that. I think that that is pretty safe. And that now I think this whole question have had a positive outcome which is everyone has been told that everyone now is focused on quality and that is always good to see.
GC: We seem to roll from one scandal to the next or at least one Supreme Court investigation into corruption allegations to the next. What do you think foreign investors should conclude about this? Either that Brazil is still very corrupt and a lot of work needs to be done or it's a good job that the lawyers are getting on top of this finally and the judges are rooting it out.
HM: I think it's more the latter. I think that what we are seeing now is the strength of the Brazilian institutions. You see the judiciary working their fellow police conducting their investigations on an independent way and eventually they are doing their job. In summary I think that we are basically seeing a process in Brazil which we were at the end of the day leave the country in a much stronger and better shape institutionally. And that is important. I've met some officials from other countries who tell me, that maybe the markets particularly, they say well my country will not survive that kind of process that Brazil is going through in the sense that it's really a very serious question Brazil and now they are taking very seriously this question of the relationship between private interest and public interest and etc. And I think that's good for the country. This will leave a stronger Brazil in the medium and longer term and their economy is recovering. People worried that that the great problems and to stop the recovery it's not. Actually, it's gaining momentum and we are seeing that month compared to the previous month. It's increasing. Last month we could see a 1.3 percent monthly growth, which is not seen for already several years. But in summary, things are beginning now to get traction. And I think that the country is going to be a better country.
GC: Although when we look at some of the recent coverage of the pension reform program, we see disgruntled police officers trying to storm the parliament because they're unhappy about reforms. Is there a risk that this reform agenda is going to be knocked off course and there's going to be a policy which delays the growth benefit that you're seeking?
HM: The schedule is being followed and the Social Security reform is not an easy reform or a non-controversial one in any country. We have seen statements which are made by representatives of many countries who visit Brazil and say that is normal. When we did that then five years ago there were 10 years ago it was the same thing. The violence is negative. That's the only negative part in this and some windows are broken, our doors are also destroyed.
But having said that, I think that's normal. People will defend their own leaders. They want to retire earlier. On the one hand, on the other hand we have a question of capacity of the Social Security system to fund the pensions and retirement benefits for… for…. for the next decades. And this is what we are addressing. I think it's going to work out.
GC: This is one of the reasons why the IMF cites a more modest growth rate for 2018 than you yourself cite. Why have the IMF got it wrong and you've got it right? Do they not understand the Brazilian approach to dealing with rioters?
HM: I didn't have the opportunity to analyze this substance line in the lining. The IMF estimates we have our economists are working on making contrarian calculations etc., but we are very comfortable with our estimates in the sense that growth is already coming. It's already happening. We are seeing that in the numbers very clearly we expect to have the 2017 GDP average compared to the 2016 being a half percent growth. But if we compare the last quarter of 2017 according to our projections to the last quarter of 2016 we haven't seen something like 2.7 percent. Why? Because we are coming from a low base. That statistical carryover is what brings the 2017 numbers down to half percent. But having said the annualised growth rate for the last quarter according to our estimates is going to be around three to 3.2 percent which would lead us into 2018 very strong year. We have an output gap because the country GDP declined for more than two years and the deepest recession ever in the Brazilian history and the good news is that with the companies already having deleveraged, the consumers already also deleveraged somewhat to all of that together and a much stronger confidence in the economy with the basic reforms being approved. We have all the conditions to have that going.
GC: Look, you're no longer at the central bank of course, you're the Finance Minister and you understand central banking independence. But let me ask you on the current glide path for inflation and for interest rates would it be your expectation that we will be significantly lower on key benchmark rates by the end of this year?
HM: Yeah. The central bank is giving a very, very clear, very clear signal that that's the case. Inflation is already coming to the target range and probably we'll see inflation below target on a 12 month basis by the middle of the year. We will have actually inflation having to come up somewhat during the second half of the year to get to the target by the end of the summer. That gives plenty of room for central bank to act.
GC: Excellent. Good. Thank you.