The sudden departure of two top economic officials in Brazil has dealt a damaging blow to finance minister Paulo Guedes, raising fresh questions about his future as well as the commitment of the Jair Bolsonaro administration to economic reform plans.
Salim Mattar, Brazil’s privatisation secretary, and Paulo Uebel, the debureaucratisation secretary, walked out on Tuesday night after complaining about the lack of progress in the government’s much vaunted economic agenda — a sweeping programme aimed at chopping back the bloated state through privatisations, cutting red tape and administrative reform.
“The fact is the resignation of a secretary shows dissatisfaction . . . [they were] looking at what’s going on and didn’t like it. Now, the politicians are in charge of the timing of the reforms,” said Mr Guedes, acknowledging that his trademark reforms had stumbled during the coronavirus crisis, but placing the blame on the “political establishment”.
A University of Chicago-educated economic liberal, Mr Guedes vowed not to quit as finance minister — to do so would send shockwaves through financial markets and frighten investors, who view him as critical to restoring the lustre of Brazil.
The developments, however, suggest that his plans to overhaul the economy are increasingly at risk and that the fiscally-responsible Mr Guedes is becoming more isolated, out of step with officials who want to spend.
Lucas de Aragão, a partner at consultancy Arko Advice, said he believed that Brazil’s economic reform plans would continue but at a “much slower pace than people expect”.
“One reason is we have a Congress in the middle of this. Today, the main incubator of policies is Congress, so government has to negotiate and try to find solutions from them. But Congress is slow,” he said.
Mr Mattar, the outgoing privatisation secretary, said “politicians were not interested in privatising”.
“The public machinery defends government assets by creating a legal tangle that makes the process very slow,” said Mr Mattar, who did not deliver any big privatisations during his term. “There is something called political will. And there is no political will to make privatisations.”
After almost 18 months in power, the Bolsonaro administration only actively began engaging with Congress recently when the president struck a deal with a powerful bloc known as the Centrão. In what was seen as a bid to block any attempt at his impeachment by opponents, Mr Bolsonaro exchanged important posts for the support of the 157 politicians in the lower house of Congress.
The move has boosted the president’s bargaining power in the legislature, but alienated key economic officials opposed to the costly policies of patronage.
Congress is also currently preoccupied with an upcoming tax reform and it appears unlikely that other key parts of Mr Guedes’s agenda, including an administrative reform of the state as well as central bank independence, will be considered before next year.
“Having major reforms in a single electoral cycle is not easy. And we already had a big one that caused a lot of wear and tear,” said Sergio Vale, an economist at MB Associados, referring to the passage of a landmark pension reform last year. “The next two years will require great political effort from Guedes.”
One emerging flashpoint is a looming debate over spending and the future of a mandated budget ceiling, which has pitted the fiscally cautious Mr Guedes against an array of powerful interests, including influential former military officers within the executive.
These forces want the government to loosen the spending ceiling in order to finance projects that would boost the economy post-coronavirus, but also reap electoral rewards for Mr Bolsonaro in the next polls in 2022.
“Guedes is isolated. What is lacking is a political bridge with the other main actors discussing fiscal policy, which are the president, the military and the Centrão. It seems this will become a tug of war, with victory to those three,” Mr Vale said.
Mr Bolsonaro has defended the spending cap, but analysts expect some form of loosening in order to prevent a fiscal contraction of hundreds of billions of dollars next year.
Few also believe that the president is as committed to fiscal rectitude and reforms as his finance minister. In particular, the former army captain is viewed as vulnerable to the numerous generals in his cabinet, who want to spend big on infrastructure projects.
“If you take into consideration Mr Bolsonaro’s career as a backbencher, he was all the time against privatisations and in favour of state intervention. He has the mindset of the military in Brazil, which is big on development and state intervention,” said Maílson da Nóbrega, a former finance minister.
Analysts believe that the debate over spending represents a red line for Mr Guedes, who recognises the sensitivity of international investors to Brazil’s worsening fiscal position.
Mr da Nóbrega, however, says the immediate problem facing the minister will be to attract talent to his ministry to replace Tuesday’s departures.
“The perception is now that this ultraliberal agenda won’t be as easy as they thought at the beginning.”
Additional reporting by Carolina Pulice