100 days of Jair Bolsonaro: The economy

. Apr 10, 2019
brazil economy guedes bolsonaro Economy Minister Paulo Guedes and President Bolsonaro

Jair Bolsonaro was elected Brazil’s 38th president and given a huge responsibility: to make the country grow again and avoid the state going bankrupt. This significant task has been delegated to his Minister of the Economy, Paulo Guedes, who has been regarded by investors as the administration’s most precious asset thanks to his ultra-libertarian philosophy. In less than two months, Mr. Guedes and his team presented their proposal for a grand overhaul of the Brazilian pension system—a reform on which the country’s economy depends.

Paulo Guedes had the option to tweak the reform bill Michel Temer submitted while still in office. Instead, he chose to draft his own bill from scratch, pushing the legislative process back to square one. The minister may have underestimated the government’s inability to negotiate with Congress—but now he realizes how politics can get in the way.

</span></p> <p><span style="font-weight: 400;">But Mr. Guedes&#8217; agenda is not limited to the pension reform. <a href="">Privatizations</a>, reducing the <a href="">size of the state</a>, fighting fraud in the social security system, and opening up Brazil&#8217;s economy to world trade were high on the list of priorities. Where does the administration stand on its first economic promises? </span></p> <h2><strong>An economy in agony</strong></h2> <p><a href=""><span style="font-weight: 400;">Brazil grew only 1.1 percent in 2018</span></a><span style="font-weight: 400;"> and the first numbers of 2019 are not much better. The Brazilian Institute of Geography and Statistics (IBGE) reported that Brazil’s industry grew by only 0.7 percent between January and February, below the already low expectations of 1 percent. </span><a href=""><span style="font-weight: 400;">Unemployment remains rampant</span></a><span style="font-weight: 400;">, while consumer and business confidence is falling. </span></p> <h4><b>What to expect</b></h4> <blockquote><p><i><span style="font-weight: 400;">“The first days of the Jair Bolsonaro administration were worse than we thought. We expected an adaptation phase, but what we see is a president who is very distant from economic issues. He is not committed to the reform, as his past suggested, and he is delaying the process. The market has finally understood that it will take time to approve it and expectations are starting to decrease. To have economic prosperity, you need political stability. We see this year as a transition period for the economy; 2020 may have a better performance if the reform is approved, but we have doubts due to [Mr. Bolsonaro&#8217;s] instability.” </span></i><b>Sergio Vale, chief-economist at MB Associados</b></p></blockquote> <h2><b>More Brazil, Less Brasília</b></h2> <p><span style="font-weight: 400;">Mr. Bolsonaro did fulfill his promise to reduce the number of cabinet ministries, creating &#8220;superministries&#8221; in order to save money and produce a more streamline structure. Infrastructure auctions inherited from the previous administration </span><a href=""><span style="font-weight: 400;">were successfully accomplished</span></a><span style="font-weight: 400;"> and there are more to come. Inside the government, coordination remains a challenge and, in Congress, the pension reform is overshadowing all other proposals. </span></p> <h4><b>What to expect</b></h4> <blockquote><p><b>“</b><i><span style="font-weight: 400;">It is not easy to restructure a cabinet. The government is feeling the political cost of it now and there is also an administrative cost. The ministries are still being organized. It will take time to be successful.&#8221; (&#8230;)</span></i></p> <p><i><span style="font-weight: 400;">“The Ministry of Infrastructure corresponds to the positive move to regroup things. The minister also announced the merging of regulatory agencies which were created incorrectly and should never have been separated. The government is working on it, but the legislative proposal is waiting for a better moment. Waiting for the pension reform bill is a problem in terms of organizing the government.” </span></i><strong>Carlos Ari Sundfeld, Ph.D. in Law from the Pontifical Catholic University of São Paulo, and founding professor of the Fundação Getulio Vargas Law School</strong></p> <p><i><span style="font-weight: 400;">“Concessions and privatizations are the positive sides of the government, the auctions were a hit. I think we are going to </span></i><a href=""><i><span style="font-weight: 400;">move forward on infrastructure</span></i></a><i><span style="font-weight: 400;">, there are auctions planned for railways and roads. One of the most interesting things to follow is Eletrobras. There are a lot of uncertainties around it, but I see a chance that it will be privatized in 2020. And the same for </span></i><a href=""><i><span style="font-weight: 400;">Correios </span></i></a><i><span style="font-weight: 400;">over the next four years.&#8221; (&#8230;)</span></i></p> <p><b>“</b><i><span style="font-weight: 400;">The government wishes to move forward with the sanitation decree and telecommunications law, which have both stalled in Congress for so long. It is not likely they will move forward in the first half of the year, because of the pension reform, but they are likely to go through in the second half. They could be analyzed alongside the tax reform.</span></i><b>” Sergio Vale, an economist at MB Associados</b></p></blockquote> <h2><strong>Markets on a rollercoaster</strong></h2> <p><span style="font-weight: 400;">The mood of investors appears pegged to news from the pension reform process in such a manner that Ibovespa, Brazil’s benchmark stock index, reached its all-time high of 100,000 points and fell 7,000 points in the same week. </span><a href=""><span style="font-weight: 400;">Although optimism still lingers</span></a><span style="font-weight: 400;">, market movers are becoming more cautious—and government support has rapidly waned.</span></p> <h4><strong>What to expect</strong></h4> <blockquote><p><i><span style="font-weight: 400;">“The approval or rejection of the pension bill will affect the price of every Brazilian asset. The foreign exchange rate touched BRL 4 against the USD, which is high, because of this tension. If the reform is not approved, the USD will be negotiated around BRL 4 to BRL 4.10, a ceiling observed by Brazil’s Central Bank. But the Real will appreciate if the bill is approved.”</span></i> <b>Marcio Holland, Ph.D. in Economics, and professor at Fundação Getulio Vargas</b></p> <p><i><span style="font-weight: 400;">“After the first clash between the president sons’ and the House Speaker, there has been an important change. The president’s meeting with political leaders was well received, but I think the market will remain cautious in order to avoid surprises. Companies will soon report first quarter results and we’ll see how things progress in light of a better political mood, but I think Ibovespa will go back to 100,000 points. On the other hand, the foreign exchange rate has changed and I think the market won’t disarm its protections until clearer advances are seen, and a better environment for emerging markets abroad.” </span></i><b>Daniel Alberini, manager at CTM Investimentos</b></p></blockquote> <h2>With or without Paulo Guedes?</h2> <p><span style="font-weight: 400;">Questioned by lawmakers if he would stay in the government if the pension reform does not go through, Mr. Guedes said he is not “attached to the job, but will not be so irresponsible as to quit at the first sign of defeat”. His comments have sparked controversy and fear about economic projects if the administration’s main strategist leaves. For the time being, Mr. Guedes remains active in advocating for the reform and even went beyond his technical role, visiting Congress and campaigning for the reform alongside business leaders.   </span></p> <h4><b>What to expect</b></h4> <blockquote><p><i><span style="font-weight: 400;">“My feeling is that Congress will approve a deeply watered-down proposal and he won’t stay in the job by the end of the year. Without a relevant privatization agenda, without relevant tax reform, Paulo Guedes will have no reason to stay, because he is an authentic reformist in a government whose reformist principles are based on a headstrong right that accepted anything.”</span></i> <b>Marcio Holland, Ph.D. in Economics, professor at Fundação Getulio Vargas</b></p> <p><i><span style="font-weight: 400;">“I don’t see him leaving today. I think it is a bit early to think about that and things change a lot in politics. His visit to the House of Representatives&#8217; Constitution and Justice Committee was excellent. The only problem is that he was left alone to defend himself against the opposition. But this is an issue of political organization, not of Paulo Guedes.” </span></i><b>Daniel Alberini, manager at CTM Investimentos</b></p></blockquote> <p><a href="">[eBook] Download here your &#8220;100 days: has the new administration lived up expectations&#8221; eBook.</a></p> <p><span style="font-weight: 400;">

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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