Brazil’s recession is bad – but its state finances are even worse

. Oct 18, 2017
Brazil’s recession is bad,-- but its state finances are even worse Public servants protest austerity measures. Photo: Tomaz Silva/ABr
Brazil’s recession is bad,-- but its state finances are even worse

Public servants protest austerity measures. Photo: Tomaz Silva/ABr

In early October, protestors from workers’ unions gathered in central Rio de Janeiro. They hoped to highlight their opposition to the privatization of Brazil’s state-owned energy company, Eletrobras. But for many Brazilians, this is just the latest in a series of privatizations debated in Congress as the country tries to curb its debilitating federal and state deficits.

Brazil’s state deficits are no secret: the overwhelming majority of its states owe the federal government billions of reals, without having sufficiently productive economies to repay their debts. Just before last year’s Olympic Games, Rio de Janeiro became one of three states to declare “financial calamity,” allowing it to access extra funding but triggering further debt renegotiations.

</p> <p>Consequently, states are now looking at the privatization of public services as a part of new bailout deals. As many as fifteen of Brazil’s states are interested in privatizing their sanitation companies, according to Brazilian newspaper <a href=",privatizacao-do-saneamento-ja-atraiu-15-estados,70001951732"><em>O Estado do São Paulo</em></a>. Infrastructure, too – from <a href="">prisons</a> to <a href="">state-specific energy companies</a> to long stretches of <a href="">highways</a> – could go to private administrators. For the public, there are lingering <a href="">fears</a> that low-income residents will be priced out of public services as privatization sweeps through the country.</p> <h3>Incompetence and corruption</h3> <p>Brazilian state debts to the federal government have been snowballing since nearly the beginning of the <a href="">military dictatorship</a> (1964-1985) when Brazil adopted a centralized taxation system. Public bank loans became one of the most significant sources of state revenue – but resulted in states owing gigantic sums to the federal government, which didn’t undertake any concrete steps to address the problem until 1997.</p> <p>Huge debt renegotiations took place under then-President Fernando Henrique Cardoso, putting in place strict limits on how much debt states could take on. Under the new agreement, states were also required to reserve a proportion of their GDP relative to their debts for repayment. In practice, this meant some states ended up with as much as 15 percent of their GDP tied up.</p> <p>Hoping to further heighten the economic boom, Brazil’s federal government loosened credit restrictions in 2012, providing tax exemptions to a few economic sectors. It offered states the opportunity to acquire more credit to compensate for the loss of revenue, which the states widely accepted; by 2016, the number of state credit operations had tripled. Combined with the country’s severe recession, Brazil’s states were pushed – some to the brink of near collapse.</p> <p>According to Brazil’s Fiscal Responsibility Framework Law, Brazilian states shouldn’t spend more than 65 percent of their total revenues on wages and debt payments. However, 21 out of 27 states have crossed that line. Rio de Janeiro tops the ranking, spending 94 percent of its 2015 budget on wages and debts, according to a study by Raul Velloso, a public finances specialist who has served as secretary of the Ministry of Planning, Budget and Management.</p> <p>Only five states have not yet reached the limit. But even for them, it’s just a matter of time.</p> <p><script id="infogram_0_85a0d494-b288-477b-a133-f8208f6f89eb" title="States wages debts" src="" type="text/javascript"></script></p> <h3>Public debts are less abstract than they seem</h3> <p>But public debts are everyone’s problem – even in Brazil’s richest state, São Paulo. A vicious drought <a href="">severely affected the city in 2015</a>, leaving more than 20 million Brazilians without water for 20 hours a day. Experts believe it might have been a complex combination of poor city planning, climate change, and Amazon deforestation, but there was one other crucial factor: according to some estimates, as much as 40 percent of water supplies across the country are lost due to outdated infrastructure and leaking water pipes.</p> <p>Just like in other Brazilian states, São Paulo’s water and sanitation is in the hands of a state-owned company. Given their current financial statuses, states are still largely without the financial means to upgrade water and sanitation infrastructure.</p> <p>Even prior to talks of privatization, economists predicted that state debts would have a severe impact on public services and social areas in Brazil. “The bigger state debts are, the smaller the quantity and worse the quality of public services that the state is responsible for,” Raul Velloso told <strong>The Brazilian Report</strong>.</p> <p>In post-Olympic Brazil, the federal government redefined the terms of states being able to claim “financial calamity” – a state which, as public finances watchdog Contas Abertas <a href="">notes</a>, was supposed to be reserved for natural disasters. Proposed privatizations have proliferated, with <a href=",894643/para-economistas-impacto-maior-e-no-longo-prazo.shtml">57 deals currently</a> on the table despite vocal opposition from workers’ unions and syndicates.</p> <h3>Is privatization the answer?</h3> <p>Despite public opinions, investors widely support potential privatizations of state-owned companies. Speaking to <a href=",894643/para-economistas-impacto-maior-e-no-longo-prazo.shtml"><em>O Estado do S. Paulo</em></a>, Austin Rating’s chief economist Alex Agostini said these signal to the market that Brazil is open to private business – an attitude which usually attracts foreign investment and boosts economies.</p> <div id="attachment_713" style="width: 995px" class="wp-caption alignnone"><img aria-describedby="caption-attachment-713" class="size-full wp-image-713" src="’s-recession-.jpg" alt="protest in Brasilia Brazil’s recession" width="985" height="669" srcset="’s-recession-.jpg 985w,’s-recession--300x204.jpg 300w,’s-recession--768x522.jpg 768w" sizes="(max-width: 985px) 100vw, 985px" /><p id="caption-attachment-713" class="wp-caption-text">Protest in Brasília. Photo: Dippost</p></div> <p>Not all economists look so favorably on the potential deals, though. Long before the privatization of state companies was on the table, the Federal University of Pernambuco economist Tânia Bacelar de Araújo <a href="">said</a> at a 2014 conference: “The government closes in the red and needs to be financed. For this, it issues bonds for those who have money to finance it, and pays a very high interest rate to these people.” The prevailing consequence, Araújo concluded, is that there are further cuts to social sectors because governments can’t cut investors’ shares without losing essential financing.</p> <p>For Velloso, although it won’t be enough by itself, privatization is currently the best possible solution for Brazilian states. “There’s a misperception that the private sector doesn’t bring good services,” he said. “The privatization of telecommunications in the 1990s was very successful because it was a service that the public was really wanting to be of quality. Bringing on board private companies – many from abroad – showed the public that it was an advantageous move.”</p> <p>Although Brazil has managed two consecutive quarters of GDP growth, economists point out that these incremental victories are mostly coincidental. More needs to be done to stimulate and sustain growth, to give states the best chance possible of recovering – even if privatizations attract foreign investment and bring improvements to public services.</p> <p>Without further efforts to pull out of the recession, Velloso warns, there is little hope for Brazil’s states to pull out of the red. “State finances were very much affected by this deep recession. But we have a structural problem, in that current structures are really rigid and don’t allow for adjustments in the face of problems,” he said. “This is the worst recession in Brazil’s history – and it had a huge effect on Brazil’s states’ finances.”

Ciara Long

Based in Rio de Janeiro, Ciara focuses on covering human rights, culture, and politics.

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