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The Jair Bolsonaro government completed a year in office on 1
January 2020 with a relatively positive balance. This includes
improved economic growth, particularly in the second half of 2019;
in the third quarter of 2019 private consumption went up by 0.8%
quarter on quarter and fixed investment rose by 2.0%, confirming
the return of relatively strong growth in capital spending observed
in the second quarter of 2019.
The government has made progress with the approval of
the critically important pension reform and concrete steps towards
privatisation and even a marked decline in crime
indicators. In 2019, dozens of airport and
electricity-distribution concessions were granted as well as
divestment of assets by strategic state-run companies such as
Petrobras. Such progress was accompanied by improved business
confidence and robust foreign direct investment inflows: USD76
billion in 2018, the best result in five years, with 2019 expected
to attract similar inflows. However, the main challenge for Brazil
is whether these positive trends will be maintained through 2020
and beyond.
The successful amendment of Brazil's pension system
constitutes the country's most important transformation in 20
years. The Brazilian Congress approved substantial changes
to Brazil's pension system on 22 October 2019, following several
failed attempts by previous administrations since the late 1990s.
The adjustments represent a significant political and economic
development that will help to stabilise Brazil's stock of sovereign
debt, which had been growing at an unsustainable rate since 2013.
Under the new reform, the retirement age will increase from 56 to
65, pension contributions will increase, and the generous benefits
previously available will be reduced. The government expects the
changes to save fiscal outlays totalling USD194 billion over the
next 10 years. Its approval has restored public and market
confidence in policy-making and better-than-expected economic
growth in the second half of 2019 has added to the more positive
outlook. In response, IHS Markit has upgraded its forecast for GDP
growth in 2020 to 1.7% of GDP from 1.5%.
The alignment of Congress with the liberal agenda of
Economy Minister Paulo Guedes has helped to achieve approval for
pension reform, but such co-operation is unlikely to be maintained
for the second phase of market reforms. Brazil's large
fiscal shortfall, which is about 7% of GDP, requires further fiscal
adjustment to restore public-debt sustainability. Guedes has
pledged further substantial changes in 2020. His objectives include
tax and administrative adjustments, which if approved by Congress,
would aim to eliminate the primary fiscal deficit. His proposed
measures will be discussed by Congress in February 2020. However,
the relevant bills are likely to face strong resistance,
particularly the draft legislation to change the public
administration. This comprises a major overhaul of the civil
service, including restraints on public-sector wages and a
reduction of generous benefits. Likely opposition will be
exacerbated by electoral factors; Brazil is holding local elections
in October 2020 and from July, legislators can be expected to shift
their focus towards the upcoming campaigns. This implies that they
would be to likely to avoid supporting unpopular austerity
policies. Changes to the tax system will also require detailed
negotiations with Congressional leaders and state governors before
a final consensus version can be agreed upon.
President Jair Bolsonaro's stance on fiscal
rationalisation is likely to be lukewarm as his priority will be
the promotion of his socially conservative agenda.
Bolsonaro has expressed his public support for the pension overhaul
and the additional fiscal amendments promoted by Guedes. In
practice, he has given his economy minister effective freedom to
pursue fiscal austerity. However, the president has avoided taking
a role of personal leadership in sponsoring the changes. Instead,
he has adopted a hands-off approach, failing to engage Congress in
negotiations, and occasionally having public disagreements with
Rodrigo Maia, the influential Speaker of the Lower House. Bolsonaro
has instead prioritised the socially conservative policies on law
and order, crime, and education that were central to his election
campaign in 2018. The president's reluctance to drive sponsorship
for the fiscal agenda is a considerable hindrance to the prospects
for approval of the additional fiscal modifications proposed by
Guedes.
Bolsonaro's lack of a cohesive base in Congress will
limit the government's ability to achieve congressional political
consensus. Bolsonaro is currently not aligned to any
political party after resigning on 15 November 2019 from the Social
Liberal Party (Partido Social Liberal: PSL), under which he
campaigned as presidential candidate. He is creating a new
political vehicle to be named "Alliance For Brazil", but electoral
legal constraints have delayed its launch. This implies that the
new party will be unable to participate in the October 2020 local
elections as initially intended. Additionally, in-fighting within
the PSL has split his 60-strong base of congressional deputies.
This is a major hurdle in efforts to secure the votes needed to
approve fiscal changes. Failure to approve the proposed measures
would damage the business environment, discouraging foreign
investment and constraining economic growth.
Indicators of changing risk environment
Increasing risk
Leaders of centre-right parties in Congress announce strong
opposition to the proposed administrative reform, following
nation-wide protests by labour unions.
State governors refuse to support draft fiscal measures,
arguing that the measures will cut state-level income streams;
instead, they urge congressional legislators to reject the
bill.
In-fighting between Bolsonaro and his former PSL allies results
in the latter withdrawing support for key parts of the government's
agenda.
Decreasing risk
The heads of the Lower House and the Senate reach an agreement
with Guedes to prioritise the bill to modify Brazil's state
administration.
State governors indicate support for unification of value-added
taxes after the government offers additional budget reallocation of
revenues from "pre-salt" oil auctions.
Posted 15 January 2020 by Carlos Caicedo, Senior Principal Analyst, Latin America Country Risk