This content is from: Home


The new team named to lead Latin America's biggest economy -- and largest bond issuer -- has received mostly positive reviews.

The new team named to lead Latin America's biggest economy -- and largest bond issuer -- has received mostly positive reviews.

By Lucy Conger
January 2003
Institutional Investor Magazine

Leftist-turned-centrist Brazilian president Luiz Inácio Lula da Silva (Institutional Investor, December 2002) appointed former FleetBoston Financial Corp. president Henrique Meirelles as head of the central bank and Antônio Palocci, ex-mayor of prosperous commercial hub Ribeirão Prêto, as Finance minister. Their appointments added momentum to the real's steady appreciation.

During his 28-year career with BankBoston, Meirelles, 56, rose through the ranks, starting out in Brazilian leasing operations, then presiding over the retail bank in Brazil and finally becoming the first Brazilian to lead the global operations of the U.S. institution. He headed the negotiations that led to the 1999 merger of BankBoston with Fleet and resigned last August to campaign, successfully, for Brazil's National Congress. In a nod to political diversity, he's a member not of Lula's Partido dos Trabalhadores but of the opposition Partido da Social Democracia Brasileira.

Palocci, a 42-year-old physician and a lifelong member of Lula's Workers' Party, has forged ties between the incoming administration and a skeptical business community. As a two-time mayor, he privatized the municipal telecom, and last year he was in charge of drafting Lula's campaign platform.

Investors were especially cheered by Meirelles's appointment. "He is a man of great experience in international and domestic banking and obviously knows the Brazilian economy well," says William Rhodes, vice chairman of Citigroup.

Confirmed by the Senate on December 17, Meirelles told legislators that fighting Brazil's rekindled inflation -- a major concern of investors -- would be his top priority. The new central bank chief also testified that Lula was preparing legislation to give the bank greater autonomy in carrying out monetary policy; the central bank now reports to the Finance minister.

Critics note that the central bank chief -- an engineer by training -- lacks an economics background and has little experience in the technical aspects of finance. "He's a banker, not a policymaker," asserts John Welch, head of Latin American research for West LB in New York. According to Joyce Chang, head of global emerging-markets research at J.P. Morgan Chase in New York, Meirelles represents "the best balance between the desire for change and the need to preserve market credibility." The central banker has kept on all seven bank directors who served under his highly regarded predecessor, Armínio Fraga.

Finance Minister Palocci made his Wall Street debut in a December 11 meeting at the New York Fed, where he told executives of seven banks that invest in Brazil that his chief tasks were reducing inflation and maintaining monetary stability. "There will be no solutions that are tentative, strange or heterodox," Palocci assured the bankers. He reiterated PT campaign pledges to continue inflation targeting (current bull's-eye: 6.5 percent), maintain a floating exchange rate and achieve a sufficient budget surplus to reduce Brazil's 50 percent debt-to-GDP ratio.

The IMF is to provide the country with $24 billion in 2003, provided that it passes certain economic tests -- achieving a fiscal surplus of at least 3.75 percent, for one. Tax and civil-service pension reforms that place high on the PT's agenda could provide savings for the surplus, Palocci indicates. "We want public sector accounts to be solvent," he told the New York bankers, "and we want to achieve social justice."

Says Steve Cunningham, head of Morgan Stanley's Latin America investment banking department, "People were very impressed with Palocci's knowledge of issues facing Brazil, his ability to grasp issues quickly, his collegial approach in government."

To skeptics, of course, Brazil appears forever to be heading for a crisis, in a crisis or emerging from a crisis. The new team can count on feeling pressure, but may get some breathing room. "This is a major political change, and investors do not want the Lula government to feel there needs to be immediate, urgent action, so they're prepared to wait for intelligent policies to be implemented," says Morgan Stanley's Cunningham. Still, Meirelles and Palocci would be wise to hit the ground running -- in the same direction.