Brazil reforms: has Jair Bolsonaro missed his moment?
When Brazil’s congress finally approved a landmark pensions reform in late October after more than two decades of prevarication, business groups cheered and investors started to wonder whether President Jair Bolsonaro’s far-right government might finally deliver on an ambitious agenda to revive Latin America’s largest economy.
“Everything is falling into place,” crowed Brazil’s US-educated finance minister Paulo Guedes in an interview days later. “There is a new politics in Brazil.”
But as the controversial pension reform passed into law, demonstrators 3,000km away across the Andes in Chile were rioting against the very system he had hailed as an example. Days later, Brazil’s leftwing opposition was galvanised by the release from jail of charismatic former president Luiz Inácio Lula da Silva pending an appeal against his corruption conviction.
Now, as the window for passing major legislation ahead of 2020 municipal elections starts to close, Brazil-watchers are asking whether the Bolsonaro government can deliver on the rest of its reform programme or whether the country will again succumb to its perpetual habit of disappointing investors.
“They have talked a very good game on reform,” says William Jackson, chief emerging market economist at Capital Economics. “But it does seem that since the pension reform passed, some of the headwinds have grown . . . It is not clear there is the same appetite for overhauling the public administration and the environment has shifted.”
For many people around the world, Brazil’s “new politics” is associated with Mr Bolsonaro’s outspoken attacks on Amazon conservation and gay rights, or his advocacy of God and guns as solutions to Brazil’s chronic social problems since taking office this year.
Yet, many in the Brazilian business community have been more focused on the nascent economic reforms his government has proposed. On São Paulo’s Avenida Faria Lima, known as Brazil’s Wall Street for its concentration of investment banks, the optimism in some quarters is palpable — even if economic growth remains weak. The Bovespa share index hit a record high on November 7, up 20 per cent on the year; initial public offering issuance in 2019 was the highest for a decade at $22bn; and low interest rates have driven Brazilians to abandon the safety of bank deposits and risk their money on stocks for the first time in years.
“A new Brazil is being born,” says Paulo Skaf, head of the powerful São Paulo industry group FIESP. “We are seeing organic growth without the government injecting money. For the first time in 70 years, we’re growing on our own.”
A former day trader and entrepreneur who learnt economics from Milton Friedman at the University of Chicago, Mr Guedes remains determined to push his “More Brazil Plan”. Nothing will stop him from cutting the state, “privatising everything” and deregulating, he says, name-checking Margaret Thatcher, Ronald Reagan and the “wonderful transformation” which Friedman’s “Chicago boys” carried out in Chile during the dictatorship of Augusto Pinochet in the 1970s and 1980s.
But following weeks of riots in Chile, where masked protesters burnt Santiago’s metro stations, looted supermarkets, ransacked churches and pelted police with projectiles as they vented their anger over years of inadequate public services and low wages, Mr Bolsonaro appears to be having second thoughts over how hard to push potentially unpopular reforms.
With an eye on forthcoming municipal elections and his own flagging electoral support, the president has postponed until next year one of Mr Guedes’ key reforms, an overhaul of the terms and conditions of Brazil’s pampered federal employees, who enjoy guaranteed jobs for life and automatic promotions for seniority regardless of performance. When the so-called “administrative reform” bill was reintroduced, it would be “as soft as possible”, said Mr Bolsonaro, who recently left the political party that backed him in last year’s election, the Social Liberal party, after a messy falling-out.
Government officials deny that the Chilean riots or October’s heavy election defeat in Argentina of a Bolsonaro ally, President Mauricio Macri, have influenced their considerations and Mr Guedes remains as determined as ever to enact his sweeping changes.
But, as Gabriella Dorlhiac, executive director of the International Chamber of Commerce in Brazil, puts it: “Chile and Argentina are a very clear signal that if reforms are to succeed, people need food on the table.”
With administrative reform on the back burner, attention is now focused on the remaining legislation. This includes a sweeping simplification of the country’s Byzantine tax system, long a key demand of business. The legislation is mired in Brazil’s 25-party congress with competing proposals jostling for attention and powerful lobbies mobilising to defend special interests.
Congress has taken centre stage because Mr Bolsonaro’s controversial government lacks a majority and the pension reform only passed because a cross-party coalition of legislators, led by the influential lower house speaker Rodrigo Maia, decided to back it. As the chairman of one bank in São Paulo put it: “Congress is governing despite Bolsonaro.”
Joice Hasselmann, a lawmaker from the Social Liberal party, says the pillars of the reforms were the pensions, taxation and administrative bills.
“If the tax and administrative [laws] are not approved, the government’s plans for a reform agenda are compromised. However, a considerable number of the parliamentarians in Congress have caught the mood of the reform agenda and so it could be that even against the headwinds, we are able to make this fly in Congress.”
A second senior pro-reform legislator says it is too early to say whether further reforms are dead. “The postponement of the administrative reform showed political caution from the [presidency] in not wanting to present so many polemical reforms at the same time,” he says.
Opposition legislators have been emboldened by the protests against pro-business governments in Chile, Argentina, Colombia and Ecuador. Scenting political blood, they have attacked the tax proposals for focusing on simplification, saying the emphasis should instead be on addressing the unfairness in the system, which contributes to one of the globe’s highest levels of inequality.
“Brazil has the most regressive tax system in the world,” says Ciro Gomes, a leftwing former presidential candidate. “It is one of only two countries which does not levy any tax on dividends . . . you pay [vehicle tax] on motorcycles but not on yachts, jet skis or helicopters.”
Another unpopular government reform would impose automatic austerity measures if the country’s notoriously profligate municipalities and states breach maximum levels of borrowing, triggering a “fiscal emergency” which would freeze salaries and hiring.
Mr Guedes also plans to abolish as many as one in five of the country’s 5,570 municipalities by 2025, forcing them to merge into bigger entities if they are unable to fund at least 10 per cent of their spending themselves and have fewer than 5,000 residents.
In potentially affected towns such as Quadra, a neat and tidy farming community known as Brazil’s “white corn capital” for its main crop, citizens are already mobilising to fight the plans. Set among rolling green fields in the rural hinterland of São Paulo state, Quadra is proud of its record in delivering quality health, education and other public services since it was carved out of a larger municipality in 1997. It even has its own town anthem, composed eight years ago by locals to celebrate their farming history.
More than a third of those employed in Quadra work for the town hall and the mayor, Luiz Carlos Pereira, fears for the future. “Bolsonaro is trying a different kind of politics and abolishing the municipalities is a good plan because it would reduce expenses,” he says. “But he cannot do this to Quadra. If we lose city status, our budget would be slashed. Our roads, schools and health services would disintegrate.”
Some of the town’s voters who supported Mr Bolsonaro in last year’s presidential election are now having second thoughts.
“There have been many changes with this new government, but they are not positive. That is why the town is regretting having voting for him,” says Marli Aparecida Vieira, co-ordinator of the local school. “This project will harm our school. We will become a forgotten place.”
Mr Guedes is unrepentant about the need to cut the state, despite its decisive role in reducing poverty and improving public services over the past decades. “Public expenditure came from 18 per cent at the beginning of the military government [in 1964] to 45 per cent of gross domestic product,” he tells the Financial Times. “So, if you want to tell the history of Brazil in the last 40 years, you just have to show this graph: 18 per cent to 45 per cent. Everything is in there. High interest rates, hyperinflation, the debt moratorium, very high taxes.”
Many Brazilians do accept the need to trim lavish perks for public sector workers — a well-paid life-long career in the federal bureaucracy is one of the most sought after in Brazil — and to simplify regulations in a country ranking 124th on the World Bank’s Ease of Doing Business index.
The economic picture also shows the need for action. Growth is still sluggish, with only 1 per cent expected this year and just over 2 per cent next year. The outlook has not been helped by the announcement on Monday by US president Donald Trump that he would reimpose tariffs on aluminium and steel imports from Brazil and Argentina.
Public finances remain precarious, with an overall fiscal deficit of about 6.5 per cent expected this year and gross public sector debt approaching 80 per cent of GDP.
“Addressing the unsustainable public debt dynamics remains, unquestionably, the key macro challenge facing both the executive and legislative branches,” wrote Goldman Sachs in a note last week
Little is now expected to happen before the Christmas legislative recess, which lasts until the start of February, but a source close to Mr Maia, the lower house speaker, says he is still optimistic the package can pass next year.
There remains, however, only a small window for change before campaigning for next year’s municipal elections begins in the summer. By 2021, attention will already be focused on the next presidential election.
Mr Maia, whose support has been critical for the government, is set to step down from his post at the end of 2020 and the decision by the mercurial Mr Bolsonaro to abandon the Social Liberal party which helped him to power and founded his own movement has further complicated matters.
While some investors applaud Mr Guedes for the boldness of his plans, he has also been heavily criticised for poor political judgment. He was roundly condemned after suggesting to reporters in Washington last week that nobody should be surprised if events like those in Chile prompted a Brazilian leader to introduce a new AI-5, an infamous decree during the 1964-1985 military dictatorship that gave the generals the power to close Congress and suppress dissent.
“It is deplorable that people can speak about AI-5 as if it were something trivial. It wasn’t, it was serious, it hurt democracy. We managed to restore democracy in Brazil and we have to fight to preserve it,” said former president Fernando Henrique Cardoso.
With a politically accident-prone government, a reinvigorated opposition and a weak economy still struggling to grow, few regard the passage of future reforms which would cut public sector jobs as a sure bet.
“If we had somebody capable as president who could negotiate with Congress, the economy would be growing much faster,” says the chairman of the São Paulo bank. “Nobody believes that Bolsonaro has deep convictions about the economic agenda because as a lawmaker he never backed these kinds of changes. What happens if he fights with Guedes and pushes him out?”
“We have a schizophrenic Brazil at the moment,” concludes a second senior investment banker in São Paulo. “You have Dr Jekyll: the economic team, plus competent ministers in areas such as infrastructure and agriculture. And you have Mr Hyde: Bolsonaro and his social agenda covering education, morals, the environment, plus the antics of members of his family.
“The risk for Brazil is that growth takes too long to appear, the people grow restive and Mr Hyde takes over.”