Bolsonaro’s war on states could backfire

. Feb 18, 2020
tax reform bolsonaro President Bolsonaro. Photo: Carolina Antunes/PR

The president’s war with state governors might hamper the tax reform. Courts find oil workers’ strike illegal. And expectations with the Brazilian economy are going down.

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Bolsonaro’s conflict with states could frustrate tax reform

In recent weeks,

President Jair Bolsonaro has been in something of a public dispute with state governors. The most recent case concerned the death of crime boss Adriano da Nóbrega, who was killed by Bahia state police last week, though Mr. Nóbrega&#8217;s body shows <a href="">all the signs of professional execution</a>. Mr. Bolsonaro held Bahia Governor Rui Costa—of the opposition Workers&#8217; Party—as accountable for the killing, saying he has ties to known criminals, which is a dig at former President Lula. However, it is Adriano da Nóbrega, an actually known criminal, who has several <a href="">links to Jair Bolsonaro&#8217;s family</a>.</p> <p>In response, 20 of 27 state governors—many of whom were once Bolsonaro supporters—published an open letter to repudiate the president&#8217;s comments. The statement said the president &#8220;doesn&#8217;t contribute to the improvement of Brazil&#8217;s democracy.&#8221;&nbsp;</p> <p><strong>Why it matters.</strong> The president&#8217;s erratic behavior has dented the trust between his office and state governors who think they could become Mr. Bolsonaro&#8217;s target at any given point. That could have an effect on the approval of major proposals in Congress, namely the tax reform.&nbsp;</p> <p><strong>Obstacle.</strong> States exert a great deal of influence in the Senate and they could make life exceedingly difficult for the government. The reform will change the collection of taxes on goods and services—the main source of revenue for state administrations.&nbsp;</p> <p><strong>Even more difficult.</strong> To make matters worse, Congress will only <em>really</em> work until July. After that, congressmen will focus on municipal races—important for setting up their own re-election bids in two and a half years. So approving the tax reform in 2020 becomes more and more of a longshot.</p> <p><strong>Fuel tax.</strong> At the beginning of the month, <a href="">Mr. Bolsonaro promised to lift all federal taxes on fuels</a> if governors did the same. The president was pandering to his support base while creating a political pickle for governors who may want to run against him in 2022. But the promise could never come true, as it would cost the federal government BRL 27 billion it can&#8217;t afford losing.</p> <div id="buzzsprout-player-1516360"></div> <script src=";player=small" type="text/javascript" charset="utf-8"></script> <hr class="wp-block-separator"/> <h2>Oil workers&#8217; strike deemed illegal by labor court</h2> <p>The Superior Labor Court has considered the strike organized by oil workers as &#8220;abusive&#8221; and &#8220;illegal,&#8221; authorizing Petrobras to use &#8220;administrative measures&#8221; such as wage cuts, disciplinary sanctions, and firings with cause. A previous Supreme Court ruling had authorized unions to go on strike, as long as 90 percent of workers remained active. Going into its 18th day, the movement has mobilized 50 percent of the professional oil working class, according to Petrobras.</p> <p><strong>Why it matters.</strong> In 2015, a 27-day strike cut Petrobras&#8217; output by 5 percent, causing losses of BRL 300 million. So far, the company says production has not been disrupted, claiming that strikebreakers are picking up the slack—but fears of a possible fuel shortage have been raised.</p> <p><strong>Disgruntlement.</strong> Oil workers protest the shutdown of a Petrobras-owned fertilizer producer in the state of Paraná—almost 1,000 people should be fired in a massive layoff program that will last until April.</p> <p><strong>Sanctions.</strong> If unions don&#8217;t comply with the labor court ruling, they will be fined up to BRL 500,000 per day—and could have their assets frozen.</p> <p><strong>Divestments.</strong> The factory shutdown that sparked the strike is part of Petrobras&#8217; divestments program. Last year, the company reduced its debts by USD 21 billion.</p> <hr class="wp-block-separator"/> <h2>Will 2020 be a fourth-straight disappointing year?</h2> <p>The Central Bank&#8217;s Focus Report—a weekly survey with top-rated investment firms—brings a feeling of déjà vu. Investors slashed growth projections for 2020 from 2.3 to 2.23 percent on Monday. Just like 2017, 2018, and 2019, this year starts with analysts toning down their enthusiasm about the Brazilian economy.</p> <p>As we wrote in our <a href="">Weekly Report</a>, the Central Bank&#8217;s Economic Activity Index—typically a predictor of GDP figures—came in lower than expected at 0.89 percent. While official GDP numbers for 2019 will only be published on March 4, analysts are not optimistic.</p> <div class="flourish-embed" data-src="visualisation/1410617"><script src=""></script></div> <p><strong>Internal factors.</strong> Uncertainties around the tax reform agenda are lingering, and President Jair Bolsonaro&#8217;s latest spat with state governments (see above) only adds fuel to the fire.</p> <p><strong>External shocks.</strong> The Covid-19 outbreak has sent shockwaves throughout the global economy, with the Chinese government being forced to restrict many of its economic activities due to the risks of spreading the virus further.&nbsp;</p> <p><strong>Why it matters. </strong>Since the 2015–2016 recession, living standards in Brazil have dramatically fallen. And the persistence of a sluggish economy only makes that scenario worse.</p> <p><strong>History. </strong>In 2017, growth was hampered by a corruption scandal that nearly brought down the Michel Temer presidency, which then focused all of its efforts on avoiding impeachment. In 2018, the truckers&#8217; strike nearly halted the country for ten days. And last year, the recession in Argentina delivered a tough blow to Brazilian exporters.</p> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <p><strong>Tourism.</strong> Brazil and Mexico have begun negotiations over a plan to increase bilateral tourism—including weekly direct flights from Brasília to Mexico and an update of the countries&#8217; 2011 air services agreement. In 2019, Brazil welcomed just 83,000 Mexican tourists, half of whom came on business—93 percent of them, however, plan to return. Meanwhile, the flow of Brazilians towards the North American country has grown 500 percent since 2017.</p> <p><strong>Terrorism?</strong> Newspaper <em>Folha de S.Paulo</em> reported that the Supreme Court was on alert for a possible terrorist attack against its members. The Federal Police, however, issued a <a href="">statement</a> clarifying that, while it did find people making threats against justices on deep web forums, they were &#8220;generic and didn&#8217;t present any indication of an elaborated plot.&#8221; In August 2019, we reported that the court launched a <a href="">procurement process for anti-riot kits</a>—which include 15 sets of body armor.</p> <p><strong>Stocks.</strong> The São Paulo stock market had a positive day on Monday, thanks to the rise of iron ore prices, good earnings reports from local companies—and the announcement of a stimulus package by the Chinese government. Investors were reassured by the Asian giant&#8217;s pledge to protect its economy from the effects of the Covid-19 outbreak. The day was, however, one of low liquidity—as Monday was a holiday in the U.S. (Presidents&#8217; Day).</p> <p><strong>Investigation. </strong>Without even launching a proper investigation, the Ethics Committee of the president&#8217;s office is mulling over shelving a <a href="">conflict of interest case involving Press Secretary Fabio Wajngarten</a>. In January, it was reported that he still owns a media company that has contracts with outlets that depend on ad money from governmental agencies, by way of the press department.</p> <p><strong>2020 elections.</strong> Lawyer <a href="">Karina Kufa</a>, who serves as treasurer of Jair Bolsonaro&#8217;s Alliance for Brazil, said the party has already amassed the near-500,000 signatures from voters it needs to continue its formal registration process. Ms. Kufa, however, has asked local chapters to keep gathering supporters, as several signatures are often lost due to inconsistencies in such processes. The Alliance for Brazil has up to April 4 to conclude its foundation process if it is to take part in the 2020 elections.

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