In 2012 economic growth (GDP) was quite weak (probably around 1%) and inflation rates might reach levels near 6%. Basically the macroeconomic management this year has been led by government measures through a combination of BRL depreciation, interest rate cuts (even with 12-month inflation persistently higher than the central target) and tax deduction measures affecting primary surplus. As for next year, there are still many uncertainties on the global economy. However, after the change in level of both USDBRL and interest rate since 2011, there might be stabilization of both variables for a long period. In the case of FX rate it might keep fluctuating within the range slightly above 2.00 and below 2.10, reaching the latter by end-2013. In the case of fiscal policy, government again may not reach the fiscal target (primary surplus) on next year and the main reason is the extent of tax deduction measures. Different from this year in which weak activity has also contributed negatively for tax revenues, we expect recovery on next year, although fiscal policy remains as the expansionist terrain in order to stimulate activity and curb short-term inflation.

However, Brazilian economy needs more than this macroeconomic management if it wants to grow at higher pace on a sustainable way. Brazilian economy is lagging behind on the main structural drivers of long-run growth rate: physical capital (such as infrastructure, machinery and equipment), human capital (education) and technology. In this sense, there are a couple of structural reforms that should be on the agenda for the next years. The diagnosis on what should be done to reduce the Brazil cost is correct. See the government measures to reduce energy costs, improve Brazilian physical infrastructure through concessions of ports, airports, roads and railroads, and some other tax measures like tax deduction on payroll and the debate on the ICMS single rate for all Brazilian states. However, there is still much that should be done. The design of some measures might be enhanced in order to attract large investors/businessmen with expertise on focal sectors. Although Brazilian economy is rated as investment grade by rating agencies, it still needs to be granted a "business grade" by creating a better business environment for the private sector.  Lastly, investment on the quality of education also needs a very long-term policy and mainly long-term view decoupled from short-term political interests since the most significant return may be for the next generations if there is significant improvement on the quality of education on elementary schools.

My view on the concession model - critics and short suggestion

In my view the excessive government intervention to the economy reflects the lack of a long-term and planned view on the best way to boost brazilian growth rates on a sustainable fashion. Basically, government is right on addressing the main bottlenecks of the economy, however, it fails to address the best model to tackle them.

In this sense, government measures like the anticipated renewal of power concession has the good willingness of energy costs reduction. However, I do not agree with the fast way those measures have been implemented, since it creates more uncertainty for the investors.

“The recent need of urgency” for the country to catch up on investments cannot lead to a bunch of sudden measures that may potentially affect private returns. Even considering the current government did not broke up the contract rules, only the expectation that government may change the rules certainly jeopardize experienced investors that have money and expertise to invest adequately on a specific sector. Investors are ruled not only by government speech, but mainly by government attitudes. If investors have doubts about government posture, then they avoid running the risks of a sudden future change.

I see a great difficulty for the government to define the concession model that balance the attractive private returns to compensate the risks related to those investments and the social objectives of low tariffs. This is very clear by looking at the delay on the definition of the model concession for roads, railroads, ports and airports.

Short Suggestion: In my opinion, government should weigh more on the attractiveness of those concession models for the private sector, by offering competitive returns and allowing private investors even having 100% of some concessions. In order to avoid abusive tariff charges, it should reinforce the role of regulatory agencies. Unfortunately it seems some of those agencies are composed by people nominated by political rather than technical criteria.