NEW YORK, Feb 21 (Reuters) - Federal Reserve Bank (News - Websites) of New York President William McDonough commended Brazil's President Luiz Inacio Lula de Silva on Friday, saying that the new leader's austere fiscal policies and new economic team had put the regional powerhouse on the right path.
Speaking to a Latin American forum at Columbia University's business school, McDonough praised Brazil's new Finance Minister Antonio Palocci and Central Bank head Henrique Meirelles, as well as the government's push to increase the primary budget surplus target for 2003.
"Lula da Silva is giving us a wonderful example of what you have to do if you are a left-of-center politician who has just taken over one of the most important, if not the most important, country south of the Rio Grande," McDonough said.
Lula, a former union boss who took the helm of Brazil's government on Jan. 1, was a source of deep angst on Wall Street last year as investors worried that his lack of experience and left-leaning policies would push Latin America's biggest economy toward a debt default.
The new president has since won over Wall Street with pledges to keep a tight rein on finances and pursue key reforms, such as an overhaul of the costly pension system.
Earlier this month, Brazil's government moved to underscore its sincerity about its fiscal austerity by lifting the surplus target to 4.25 percent of gross domestic product for 2003. The previous government had put the goal at 3.75 percent.
McDonough also noted that Lula, in addition to his fiscal efforts, has taken solid steps to please voters by cutting defense spending to increase funding for social programs.
While Brazil has seen international sentiment turn in its favor, the country's central bank is grappling with rising inflation. McDonough said he thought Brazil and Latin America's other economic powerhouse, Mexico, were wise in taking steps to try to keep prices stable.
On Wednesday, Brazil raised its benchmark Selic rate 1.0 percentage point to 26.5 percent and raised the minimum reserve requirement for banking deposits in a bid to stem inflation, which economists expect to hit 12 percent this year.
Mexico, meanwhile, has steadily tightened monetary policy since late last year in an effort to bring inflation down to its 2003 goal of 3 percent. Private economists on average currently forecast inflation to end 2003 at 4.3 percent.
The nation's central tightens its monetary policy by increasing the amount of cash it holds back from the secondary money market, known as the "short."
"That is, I think, the right thing to be doing," said McDonough.
The New York Fed president also noted that Uruguay, which has had its economy ravaged by the fallout of neighboring Argentina's fiscal crisis and a run on its own banks, "deeply deserves" the support of the international community because it is doing all it can to reverse its fortunes.
In December, Uruguay failed to pass an International Monetary Fund (News - Websites) review on its $2.8 billion loan program because of the fund's concerns about a lack of progress in dealing with insolvent banks. The IMF said on Friday, however, that it hadagreed on the basis for a 2003 economic program with Uruguay, a move that should open to door for the restart of aid in mid-March.
Uruguay has become a source of increased concern in emerging markets in recent weeks amid expectations that the resumption of IMF aid would hinge on a restructuring of the nation's debts. An IMF spokesman declined to comment on Friday on whether such a demand were part of the new accord.