Quarrel over social welfare policies leaves Brazil’s market rattled

. Aug 28, 2020
Quarrel over social welfare policies leaves Brazil's markets rattled Photo: Studiostoks/Shutterstock

After publicly scolding Economy Minister Paulo Guedes earlier this week, President Jair Bolsonaro gave him until Friday to present a new version of ‘Renda Brasil’ — a federal cash-transfer program that would replace and expand the world-renowned Bolsa Família scheme. Mr. Guedes’ initial proposal — involving scrapping other social benefits in order to fund the new policy — was shot down by the president, who complained that he “wouldn’t take money from the poor to give it to the paupers.”

This provoked jitters in the market and Friday is set to be a rocky day for investors as the deadline approaches. Over the past 18 months, the Economy Minister has made a habit of missing due dates — but this time, analysts fear that the wedge between Messrs. Guedes and Bolsonaro might be growing, with the political and social need for increased public spending clashing with the government’s lack of funds.

</p> <p>As our <a href="">August 25 Daily Briefing</a> explained, the government&#8217;s military wing has pushed for a major plan to foster growth by way of infrastructure projects, job-creation programs, new housing policies, and beefed-up cash transfers to vulnerable populations. But the president and Mr. Guedes —&nbsp;a quintessential deficit hawk — were <a href="">unable to agree</a> on the specifics of the program. The Economy Minister has stressed the government&#8217;s need to respect the <a href="">federal spending cap</a>, which limits public expenditure increases only to meet inflation of the previous year.&nbsp;</p> <p>Even orthodox economists have said the cap did not factor in the possibility of a pandemic-related crisis, saying that austerity measures right now could <a href="">lead to a humanitarian crisis</a>. The government&#8217;s emergency aid payments have accounted for 97 percent of the revenue for Brazil&#8217;s poorest 10 percent. They have also made President Bolsonaro more popular than ever.</p> <h2>Agonized markets want Guedes in charge</h2> <p>The anticipation for the announcement has rocked markets — observed in the sheer volatility of Brazil’s benchmark stocks index this week.&nbsp;</p> <p>Rumors about the government&#8217;s proposal have bounced around the country&#8217;s financial districts, with information often being intentionally leaked by the government to test the waters. One plan would see Bolsa Família&#8217;s monthly payments increase from the current level of BRL 190 to BRL 250 (USD 45) per family. That would come with a price tag of BRL 22 billion per year, which the Economy Ministry plans to fund by cutting a program offering free and discounted medication to treat the population’s most common health conditions — mainly diabetes, hypertension, and asthma.</p> <p>Camila Abdelmalack, chief economic at Veedha Investimentos, explains that markets would welcome a welfare policy capable of increasing consumption, but says that Renda Brasil — as it is currently being designed — would include more families and more money, which creates a need for increased fiscal room. “That’s why the markets are wary […], because the government has no money to fund [this new program],” she tells <strong>The Brazilian Report</strong>.</p> <p>In an attempt to create a social legacy for the Bolsonaro administration and comply with the spending cap, Renda Brasil is said to include several proposals to <a href="">limit public spending</a> and reshape the federal budget. The goal is to make it more manageable than it is today, with over 90 percent of funds earmarked for so-called &#8216;mandatory expenses,&#8217; which involves salaries and pensions.</p> <p>Another important point is the possibility of unpegging benefits from the minimum wage, which is annually raised according to the inflation rate. That alone could free up to BRL 16 billion.</p> <p>Marco Harbich, a strategist at Terra Investimentos and columnist at <strong>The Brazilian Report</strong>, says the ultimate goal is “to invest without poking holes in the spending ceiling, which would send a message of zero fiscal responsibility to foreign investors.”</p> <p>Fears of a federal spending spree have affected Brazil’s 5-year Credit Default Swaps (CDS), considered as a measure of a country&#8217;s likelihood of default. CDS jumped from 212.800 points on August 26 to 223.000 points on August 27.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3596418"><script src=""></script></div> <h2>The government needs cooperation from Congress&nbsp;</h2> <p>Lowering public spending and changing the way the budget works are only a few of the proposals that would require congressional approval. However, they would require constitutional amendments, which need a two-thirds majority in each congressional chamber in order to pass.</p> <p>For political scientist Leandro Gabiati, a director at Dominium Consultoria, the government&#8217;s coalition is strong as ever&nbsp;—&nbsp;but that doesn’t mean it will be easy to approve such a broad set of policies. Even less so considering the municipal elections later this year.</p> <p>“If the government manages to be more organized, it shouldn’t have a tough time with economic matters in a liberal-leaning Congress. But lawmakers are shifting their attention from parliamentary issues to municipal elections, in the short-term, and the races for House Speaker and Senate President, in the long run. That leaves little room for debate,” he tells <strong>The Brazilian Report</strong>.</p> <h2>Does Guedes stay or go?</h2> <p>For the past week, <a href="">rumors about a rift</a> between Jair Bolsonaro and Paulo Guedes have once again surfaced. However, hearsay has so often been mixed up with genuine information —&nbsp;Mr. Guedes is not a popular figure in Brasília (or even within the administration, for that matter), and many of those who spread rumors about his imminent departure are those who would fancy themselves to replace him as the government&#8217;s economic tsar.</p> <p>Since the first moments of the Bolsonaro administration, talk of a Guedes-Bolsonaro schism have been rife. But the cabinet minister has stayed put, and claims he has no plans to resign.</p> <p>Regardless, the scuttlebutt never fails to rattle markets, given Mr. Guedes&#8217; position as guarantor of the sitting government. He is seen as the only thing preventing the administration from ballooning spending without regard for austerity guidelines. Unless, of course, another deficit hawk were to get the keys to the economy in his absence.</p> <p>“If his replacement — were Mr. Guedes to leave — was someone like Central Bank Chairman Roberto Campos Neto, nothing changes. It would be a signal that a pro-market tradition would continue, despite President Bolsonaro&#8217;s own personal beliefs,” says Mr. Gabiati.

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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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