In the weeks leading up to the election’s runoff-stage between far-right Jair Bolsonaro and center-left Fernando Haddad, financial markets were in a frenzy as Mr. Bolsonaro enjoyed a comfortable lead in the polls. However, on the Monday following the election, the stock market actually went down – as did the Brazilian Real.
Why, you ask? Well, because the bets made on the former Army captain’s win had already turned a profit – and many investors decided to cash in on their winnings. From now on, the stock market will follow the markets’ reactions to the moves made by the future administration.
After the president-elect, all eyes will be on Paulo Guedes, the ultra-libertarian Chicago School economist who has been appointed as Mr. Bolsonaro’s future financial tsar. He will head the Ministry of the Economy, a merger of three existing ministries: Finance, Planning & Budget, and Industry & Foreign Trade. That will make Mr. Guedes the most powerful member of any president’s economic team since the failed administration of former President Fernando Collor – the last to have a Ministry of the Economy.</span></p>
<p><span style="font-weight: 400;">The markets’ attention to whatever Mr. Guedes does next is owed to his power and also to the vagueness of his proposals during the campaign. He avoided the press after one of his proposals – to establish a flat 20-percent income tax rate for all Brazilians, no matter the income – was heavily criticized. This week, however, he started to speak more freely – and to bump heads with other members of the president-elect’s entourage.</span></p>
<h2>The agenda of Paulo Guedes</h2>
<p><span style="font-weight: 400;">The future economic tsar has repeatedly defended an overhaul of the pension system – which cost the government roughly BRL 685 billion in 2017 alone, accounting for over 50 percent of all expenses of the federal administration. </span></p>
<p><span style="font-weight: 400;">In Brazil’s current system, pensions for today’s retired workers are paid for by current workers. Mr. Guedes wants to change that to a capitalization system, in which a workers’ pension will depend on how much they have saved individually. The Bolsonaro team, however, will still debate on this matter during the transition period.</span></p>
<p><span style="font-weight: 400;">This week, Mr. Guedes talked about how urgent it is to reform the pension system – a statement on which he had to backpedal after meeting with the president-elect and his future chief of staff, Onyx Lorenzoni. While Mr. Guedes wanted the future administration to negotiate with sitting President Michel Temer for a vote on the reform this year (which would send a very positive message to investors </span><i><span style="font-weight: 400;">and </span></i><span style="font-weight: 400;">spare the future president of the political costs of such an unpopular measure), he had to acknowledge that there might not be a congressional majority out there.</span></p>
<p><span style="font-weight: 400;">Mr. Guedes also defends a massive plan of privatizations – forecasting BRL 2 trillion from selling companies and assets that belong to the state. That process would be carried out gradually.</span></p>
<p><span style="font-weight: 400;">Finally, Paulo Guedes thinks that Brazil spends too much money on interest of public debt, “the equivalent of a Marshall Plan every year.” Besides proposing reforms that scale down the growth of public debt, Mr. Guedes wants to cut the debt itself down (using the revenue generated by privatizations).</span></p>
<h2>Controversies</h2>
<p><span style="font-weight: 400;">Just two days after the electoral win, Mr. Guedes has already had a couple of scuffles with the press and his fellow future members of the cabinet. The first was when an Argentinian journalist asked him about Mercosur, to which Mr. Guedes snapped and called the trading bloc an “ideological prison,” and that it won’t be a priority. The remarks caused a backlash, not only for his harsh tone, but also for the reactions of members of industry, who say that small and medium-sized companies depend on Mercosur for their exports and will be affected.</span></p>
<p><span style="font-weight: 400;">Then, the future economic tsar and the future chief of staff contradicted themselves in the press. Mr. Lorenzoni not only questioned how urgent the pension system really is, but also talked about establishing a goal for the exchange rate – which would be the end of the current monetary policy based on a tripod of floating currency, primary surplus goal, and inflation targets. “He’s a politician talking economics. It’s like having me discussing politics. It can’t work, can it?,” responded Mr. Guedes.
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Future economic tsar Paulo Guedes
