Given the economy’s good health, Brazil’s central bank governor Henrique Meirelles can afford to muse on soya and George Bush. Interview by Karina Robinson.

Henrique Meirelles has grasped the central bank governor patter with the zeal of a convert. He has been governor of the Banco Central do Brasil for fewer than five years versus 28 years of his working life at various incarnations of BankBoston, now owned by Bank of America, but he is a natural.

At a press conference in the dining room of the Brazilian Ambassador’s residence in London on a rainy day in May, eight journalists faced him across the table. All their questions were deflected with skill, a bit of verbiage, and no small amount of quiet amusement.

This augured badly for our later interview in the study, where the dark, wooden-panelled walls were lightened by superb abstract Brazilian art and occasional flashes of his white teeth.

True to form, he spoke interestingly, at length yet inconclusively, in response to a question about whether Brazil, one of the BRIC countries (Brazil, Russia, India and China), was destined to grow more sluggishly than its peers. But finally, with a bit of prodding, answered the question.

“Yes,” he said.

Slowing growth

The International Monetary Fund forecasts Brazilian gross domestic product (GDP) will grow at 4.4% this year. That is, slightly above the 4.1% average GDP growth rate (according to revised official statistics) for the past couple of years. As Mr Meirelles pointed out, much higher growth rates are unlikely in a country that has already experienced mass migration to the cities from the countryside and whose growth is not concentrated in key commodities.

But Brazil is still a developing country and higher growth is needed to make incursions into poverty. Investors and analysts have been calling for the central bank to cut interest rates faster – the SELIC base rate is 12.5%. Inflation was 3.1% last year and the market is looking for 3.8% for 2007 – below the median of the central bank’s 2.5%-6.5% inflation target zone.

“They are criticised for not cutting rates more aggressively as there is a general market feeling that inflation is so low that they could do so without an upturn in inflation,” says Fedra Dell’Aquila, a director of emerging markets for London-based Hermes Investment Management, which has about $400m invested in Brazil.

Presidential control

President Luiz Inácio Lula da Silva has also been rumoured to have said he plans to keep the central bank on a tighter leash during his second term in office.

“I never heard him say that,” says Mr Meirelles, dismissing the rumours as “some gossip published by journalists”. (A few days after the interview the president said publicly he would not be putting the central bank under pressure to cut rates.)

Mr Meirelles notes that the bank has operational independence granted by the president, and appears to evade a question about whether the institution is preparing the ground for legal autonomy, saying only that “most central banks today are legally independent and that has been the trend”.

But perhaps for him that constitutes a “yes”.

Brazil is in very good shape. Net sovereign debt to gross domestic product (GDP) has fallen from 56% in 2002 to 45% currently and is forecast by the Ministry of Finance to fall to 36% by the end of 2010, at about which time the budget should be in balance. The current account is in surplus. Foreign exchange reserves are almost double sovereign international debt.

Sixty-two year old Mr Meirelles believes that with all this it would be “natural to be investment grade” but he quickly adds, in his cautious way, that one should not try to predict events.

Ms Dell’Aquila believes that Brazil should make investment grade within a couple of years if prices for commodities such as soya beans and iron ore remain high and the economy continues its steady growth path.

A worry is the appreciation of the currency. The central bank has been intervening in the foreign exchange market massively this year. It now has $123bn in foreign currency reserves. Bear Stearns, in a recent note, said the bank is defending the two reais to the dollar exchange rate to contain the currency’s appreciation – although it does not disregard the bank’s arguments that the interventions are to build up foreign exchange reserves that could speed up Brazil’s investment grade rating.

But the US investment bank doubts the central bank can continue this policy over the medium to long term and sees appreciation of the real as a given.

In a note from the end of April, Bear Stearns analyses in great depth the minutes of the latest Copom (Monetary Policy Committee) meeting and whether to expect a 25 or a 50 basis point cut at the next meeting this month.

It is worth putting these concerns on market participants into perspective – Brazil has come a long way in a short time, as shown in The Banker’s 2001 interview with Brazilian finance minister Pedro Malan. The article read: “Mr Malan is accustomed to problems. But the crisis of 1998-1999, when the government was forced to allow the real to devalue following Russia’s default on its debt and plummeting confidence in emerging markets, was nothing compared with that of 1993-1994 ‘when I lost many years of my life’, he says. In 1993, Mr [Fernando Henrique] Cardoso was the fourth finance minister in Itamar Franco’s administration, and inflation was running at 3000% a year. We were a small team, facing elections in 1994, and we felt if we did not defeat inflation in this government it would surge to 7000% or 8000%’.”

Departmental reorganisation

Brazil has now reached the point where Mr Meirelles has the luxury of musing about whether the supervisory and the monetary responsibilities of the central bank should be separated.

“So far, it has been instrumental to have monetary policy, banking regulation and banking supervision all under the same board to act in a co-ordinated way in moments of crisis,” he says.

“Maybe the chances of a crisis are less and less likely and we will have to think about that,” he adds.

Mr Meirelles, whose last private-sector job was president of the Global Bank of FleetBoston Financial, based in Boston, says he became central bank governor in order to bring his international experience of the success stories of the many countries he covered back home.

US relations

He spent many years living in the US and finally lets loose – in his way – when asked whether the forthcoming presidential elections might see a reappraisal of US foreign policy towards Latin America. Since 9/11, US president George Bush’s attentions have shifted from Latin America to other parts of the world, contrary to expectations when he took office in 2000.

“That’s a possible scenario. That’s a likely scenario,” he says. “Biofuel is making Latin America more relevant to the US and other countries as an energy resource.”

He disagrees that the potential for biofuels is being exaggerated. Of the total arable land in Brazil, only 0.6% is currently used for sugarcane to be converted to ethanol, while 25% of arable land lies idle and 52% of arable land is being used for animal pasture and old-fashioned farming, he says. “This means Brazil has a tremendous amount of land for biofuel production which will not affect food production.”

Brazil already produces almost half the world’s ethanol.

When does his term end? “Every day,” he answers with a big smile. The Brazilian central bank governor does not have a fixed term.

The only question about Mr Meirelles’ career path is why he did not join the central bank many years ago. He was born for the job. But there are other careers he might have had. He would have been an excellent private banker based in Zurich, the soul of discretion for his Brazilian clients banking offshore. Or a personal assistant to a top celebrity – the kind of personal assistant who does not leave the household and blab to the newspapers.

Mr Mereilles candidly admits to not practising any sport. But he walks, he says. His special adviser, up to now a silent presence thumbing his blackberry on the sofa next to him, adds with a lift of eyebrows and a big sigh: “He walks a lot!” The adviser is wearing broad, black shoes, ideal for accompanying the governor on his promenades. Undoubtedly, these are steady, quiet walks, the silence broken only by the adviser’s heavy breathing.

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