Anti-government protests spread around Brazil

Author

Gustavo Ribeiro
May 16, 2019 • Reading Time: 8 minutes

Good morning! Protests against the Jair Bolsonaro administration erupt. President’s son could be a ringleader. A tax reform without the government’s input? Brazilian economy inching closer to recession.

Anti-government protests spread around Brazil

In the first major

wave of protests against the Jair Bolsonaro government, hundreds of thousands of people took to the streets in at least 170 cities across Brazil yesterday against education budget cuts implemented by the sitting administration. The Ministry of Education decided to freeze BRL 5.7bn of the department’s budget, including a 30% cut in discretionary funding for federal universities. A further BRL 1.7bn in cuts were announced this week. Salaries and other obligatory expenses will not be affected.

When asked by journalists earlier that day, President Jair Bolsonaro declared the protests were carried out by “useful idiots.” Mr. Bolsonaro is currently in Dallas, Texas, on an official visit. “Most [the protests are made out of] militants, their heads are empty. If you asked them what 7 times 8 is, they wouldn’t know. If you asked them the formula for water, they wouldn’t know. They are useful idiots, imbeciles being used by a cunning minority which makes up the nucleus of most federal universities in Brazil,” said Mr. Bolsonaro.

On Wednesday afternoon, Education Minister Abraham Weintraub sat before the House of Representatives’ general committee to defend his budget cuts. However, instead of being a debate on the merits of cost-cutting in Brazilian education, the session quickly descended into namecalling and ideological bluster. At one point, Mr. Weintraub claimed that former President Lula had personally asked the head of Santander Brasil to fire an analyst colleague of his, after she wrote that the Brazilian economy would deteriorate if Dilma Rousseff was re-elected.

Student unions have called for further protests on May 30.

President’s son could be a ringleader

A classified report by the Federal Prosecution Office points out strong circumstantial evidence that Senator Flávio Bolsonaro engaged in money laundering schemes—and that a corruption ring operated within his office as a Rio state lawmaker. The 87-page document was released by weekly magazineVeja and used to lift the bank secrecy of 95 persons and corporations associated with the president’s eldest son.

  • Money laundering: Investigators accuse Mr. Bolsonaro of using fraudulent real estate deals to launder dirty money. Between 2010 and 2017, he bought and sold 19 properties, managing to record unrealistic profits, a classic strategy to “simulate fake capital gain” and launder money siphoned from Rio’s State Congress. In one case, a flat of his was sold for 292% more than what he paid 15 months earlier. During that same time span, property prices went up by 11%, on average.

  • The buyer: The properties in Flávio Bolsonaro’s name were bought by a trading company partially-owned by a corporation based in Panama—a well-known tax haven. Another classic trait of illicit operations.

  • The president: 85 people and 9 companies will have their bank statements over the past decade scrutinized by prosecutors. Five of them are former aides to President Bolsonaro—some of which remained on his payroll until as recently as December. In Congress, lawmakers believe this could severely jeopardize his president, “as not even Mother Theresa would come out clean after a 10-year investigation.”

A tax reform without the government’s input?

Without any previous agreement with the federal government, House Speaker Rodrigo Maia has set into motion a proposal to discuss a tax reform for the country in Congress. Mr. Maia has publicly said that an overhaul of Brazil’s over-complicated tax system is just as important as fixing the social security deficit—and that this reform “must have the House’s fingerprints on it.”

The core of the proposal is the unification of 5 federal, state, and municipal taxes into a single value-added tax (VAT), a system already adopted in several countries and in the European Union. In a matter of just one week, the rapporteur at the House’s Constitution and Justice presented its opinion on the bill (a process that took 27 days for the pension reform—which only sheds light on the government’s ineptitude to conduct the pension reform’s process).

Government v. Congress

Economy Minister Paulo Guedes opposes the bill, believing that state and city taxes shouldn’t be included. But the reform’s rapporteur didn’t care to meet anyone from the administration. It seems that every proposal not backed by the government is progressing in the House. Meanwhile, Congress is stalling its analysis of important provisional decrees that are set to expire on June 3—including one that designed the structure of the current cabinet.

Inching closer to recession

The Central Bank’s Economic Activity Index, a sort of preview of the official quarterly GDP numbers (to be released in 2 weeks), has confirmed the Brazilian economy’s poor Q1 performance. In March, economic activity was down 0.28% and down 0.68% from one year ago. Instead of worrying about a slow recovery, analysts are beginning to fear a new recession. This scenario implies two direct consequences:

Pressure for further cuts to Brazil’s benchmark interest rate will mount. The Selic rate is already at its lowest level ever (6.5%) but real interest rates remain high in Brazil. The Central Bank could be led to more cuts as a way to stimulate consumption. Today, the government has all of its chips on the pension reform, but the perception is that it won’t be able to fix the economy alone—especially since the reform’s approval is not yet on the horizon. Meanwhile, the Economy Ministry will have to adopt a series of short-term reforms to incite investors.

What else you need to know today

  • Credit. To entice competition, the government wants to allow private banks to offer subsidized credit to rural producers—a segment currently monopolized by state-controlled Banco do Brasil. Thanks to public subsidies, the bank offers interest rates between 7.5% on its loans—against the 9-11% average, allowing it to have a 90% market share. The government wants to create a sort of auction system to make all banks fight for the subsidies—in order to spread them around more and finance more producers.

  • Prosecutor general. Raquel Dodge’s 2-year term as prosecutor general ends in September, after which President Bolsonaro must make a decision. The prosecutors’ union has published a list of 10 candidates for the job. Since 2003, it has held an internal election and presented the sitting president with a list of 3 candidates. Lula and Dilma Rousseff picked their prosecutors general based on the list, but the prerogative is entirely up to the president.

  • Aviation. In yet another setback, nearly-bankrupt carrier Avianca Brazil has been banned from the International Air Transport Association (Iata), the largest trade association of airlines in the world. The company can continue operating, but will face more difficulty signing contracts with suppliers—as it has lost Iata’s financial protection benefits in case of default. Under court-supervised reorganization since December 2018, Avianca has debts of BRL 2.7bn and has failed to pay salaries and benefits to employees.

  • F-1. São Paulo’s City Council has approved the concession of the Interlagos racing circuit. Instead of simply selling off the complex, which the mayor’s office intended, lawmakers will hand over its administration to the private initiative. They justified their choice by saying that the previous deal wouldn’t attract many bidders, as it was conditioned to a series of investments in the area around the racing complex.

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