Economy was key to Brazil win, but will he deliver?
President-elect Jair Bolsonaro, right, and his vice president General Hamilton Mourao, attend a ceremony to celebrate the 30th anniversary of Brazilâs constitution at the National Congress, in Brasilia, Brazil, Tuesday, Nov. 6, 2018. Bolsonaro is insisting on his respe ct for the country's constitution, implicitly responding to fears his administration might roll back civil rights. (AP Photo/Eraldo Peres)
SAO PAULO â" Key to Jair Bolsonaro's recent election victory was the support of Brazil's business community, which coalesced around him because he promised to overhaul Latin America's largest economy and address its worrying budget deficit. But the president-elect has been stingy with the details, and many wonder if he'll stick to his recent conversion to market-friendly reforms or if the dormant nationalist in him might reappear.
Even if he holds fast to the agenda set forth by his economic guru Paulo Guedes, a University of Chicago-trained economist and the man who convinced many investors to take a chance on Bolsonaro, the former army captain could face fierce opposition in Congress and from labor unions to what will be undoubtedly unpopular measures. His economic agenda will also have to compet e for priority with his better-known promises to crack down on crime and corruption, and the latter are much dearer to his heart â" and his base.
"It's really unclear what Bolsonaro is when it comes to economic policy," said Matthew Taylor, an associate professor at American University's School of International Service. "He himself has admitted to ignorance on the economic front, but he's also an extraordinary statist and a nationalist."
For years, Bolsonaro, who will be inaugurated Jan. 1, supported heavy involvement of the state in the economy, and he remains an admirer of Brazil's 1964-1985 military regime, which supported nationalist policies. But during the campaign, he espoused free-market principles.
It's not clear how complete his conversion is. For instance, after Guedes told reporters that he supported privatizing all of Brazil's dozens of state companies, Bolsonaro walked that back, saying he would sell off many but keep "strategic" ones, including big names like Petrobras and Banco do Brasil.
Amid this swirl of doubt, one thing is clear: Brazil must quickly cut its deficit or it risks heading back into crisis. A World Bank analysis concluded last year that Brazil spends more than it can afford and spends poorly.
Brazil's central government deficit was 7 percent of gross domestic product in 2017, according to the Central Bank, and has been above 5 percent in recent years. A large portion is interest payments on debt, but even excluding those, Brazil still had a primary deficit of 1.8 percent of GDP last year â" which economists say is unsustainable because it means the already high debt level will continue to grow.
The new administration will have only a narrow window to show investors that it's serious about addressing this problem â" by cutting spending or raising taxes â" before they will begin to balk, making an adjustment more difficult because it could drive up borrowing costs.
Compounding the challenge, Brazil is only just beginning to emerge from a two-year-long recession, and growth remains stagnant. That means it can't rely on big increases in tax revenues to help it plug the hole â" and Bolsonaro has even promised to cut tax rates.
Guedes, who will lead the Economy Ministry, appeared to be sending just that signal hours after Bolsonaro's victory on Oct. 28. He laid out a three-part plan to reduce Brazil's public spending by passing a pension reform, privatizing state companies to draw down the debt and enacting other unspecified reforms that will reduce "privileges and waste."
Pension reform will be the linchpin in reducing Brazil's state spending for two reasons: Brazil's government spends more on pensions than anything else, and many other parts of the budget can't be altered because they're mandated by the constitution.
Attempts to refo rm the pension system will likely face stiff resistance from labor unions and other groups since any measure will force Brazilians to work longer and receive fewer benefits. Bolsonaro, who in 27 years in Congress didn't show any particular gift for building consensus, will have to build a broad coalition to get a reform through. His Social Liberal Party holds about 10 percent of the seats in next Congress, but so does the Workers' Party, which is against such a reform and has vowed tough opposition.
President Michel Temer, who is known for his ability to negotiate with Congress, failed at that task. Still, Glauco Legat, the chief analyst at the brokerage Spinelli, points out that Bolsonaro's decisive win gives him more legitimacy than Temer, who came to power after his predecessor was impeached in controversial proceedings.
Any reform will be whittled away at in order to win votes, but Monica de Bolle, director of Latin American Studies at Johns Hopkins Un iversity, says she fears Bolsonaro's proposal will lack ambition right out of the gate since he has indicated he will leave military personnel out of it. That could also mean he will exclude other civil service sectors, which are key to taking a bite out of the problem.
"The watering down process is going to take place on the basis of an already diluted reform," she said.
Beyond pension reform, Bolsonaro has promised to reduce the size of the state, including halving the number of ministries, and selling off state companies. Reducing the number of ministries could yield some savings, but other presidents have struggled to do that in more than name. And Bolsonaro has already taken off the table many state companies that would yield the most cash.
Instead, economists say that many of the savings lie in eliminating inefficiencies. Guedes didn't give details, but if he's serious about reducing waste, there's plenty of it: The World Bank an alysis highlighted Brazil's high civil service salaries, a constitutional mandate on education spending that often results in spending for spending's sake, overlapping social welfare programs and a proliferation of small hospitals in the public health system.
Despite the challenges, Legat said it's important to remember that just by virtue of saying he'll take on Brazil's thorny issues, Bolsonaro has built momentum, which can have real-world effects.
"He brings optimism that's very important for the economy in this moment," he said. "This increase in confidence is reflected in real numbers."
Associated Press video journalist Victor Caivano contributed to this report.
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