Brazil’s ‘Scissorhands’ turns to helping the developing world

Brazil's former finance minster Joaquim Levy spent most of his tenure in charge trying to cut the country's ballooning budget deficit, a move that brought him the nickname "Scissorhands".

However, in his new job as chief financial officer of the World Bank, he has an entirely different agenda, namely to promote spending and investment in fragile, war-torn parts of the world, places investors normally consider too risky.

Instead of supplying money directly to these countries in the form of loans or grants, the traditional role of the Washington-based institution, the World Bank now wants the private sector to step in.

It plans to promote investment by acting as financial guarantor to projects, essentially creating a more favourable environment for investors.

"We're in a world where interest rates are negative and people are seeking new ways to deploy their savings," Dr Levy told The Irish Times at a World Bank-hosted conference on development finance in Dublin.

“After many years of exceptional growth, when so many people were lifted out of poverty, today many ask whether it will be possible for economic growth to come back,” he said.

“And while no answer to this question arises, we keep watching savings piling up and being underemployed, leading to ever lower interest rates that worry many elderly savers. It is clear that there is a mismatch of capital and investment opportunities,” Dr Levy said.

Private sector

He noted the World Bank's private sector arm, the International Finance Corporation (IFC) had invested $2.5 billion (€2.2bn) over the past three years in fragile markets in projects generating power, reviving telecommunications networks, increasing food security, helping entrepreneurs access finance and creating employment opportunities for women and youth.

The World Bank’s new initiative could also play a significant role in funding for renewable energy and other projects aimed at reducing the effects of climate change in developing countries, one of the key objectives of the Paris climate talks, he said.

Dr Levy resigned as finance minister in December after serving for less than a year when Brazil suffered its second ratings downgrade in months.

During his tenure, he cut 70 billion reais (€17.5bn) from the country’s discretionary government spending budget.

“Austerity was one piece of a wider strategy to cut the budget deficit, realign prices and enhance the country’s competitiveness,” he said.

Last year Brazil’s economy shrank by 3.8 per cent, and is expected to contract by a similar margin in 2016.

Nonetheless, Dr Levy said a pick-up in exports and investment heralded the first signs of recovery in South America’s largest economy.

Brazil woes

The University of Chicago-schooled economist said Brazil's economic woes were largely driven by crashing commodity prices, but have subsequently been aggravated by the political crisis, which last week saw president Dilma Rousseff temporarily resign ahead of impeachment proceedings.

Perhaps minded by the storm whipped up by Christine Lagarde’s warnings over Brexit - the IMF’s managing director said a vote to leave could cause a stock market crash and steep fall in house prices in the UK - Dr Levy shied away from commenting on the potential impact of the UK’s upcoming vote. He also preferred not to talk about Ireland’s tough fiscal adjustment.

While the upcoming Olympic Games have provided a focal point for Rio, allowing it complete a string of infrastructural projects ahead of time and inside of budget, Dr Levy said the event was unlikely to have a big impact on the current recession.

“In a country like Brazil, hosting the Olympics is good but it’s unlikely to add a percentage point to GDP,” he said.