Bolsonaro tries to find a pulse in the economy

Author

Gustavo Ribeiro
July 18, 2019 • Reading Time: 7 minutes

Good morning! Bolsonaro wants to mark his administration’s 200-day anniversary with a monetary stimulus package for the Brazilian economy. The House goes on holiday, but lawmakers will be quite busy when they return. And the government’s ambitious privatization plan. Enjoy your read.

Bolsonaro tries to find a pulse in the Brazilian economy

The Brazilian government is set to announce a stimulus package aimed at injecting quick money into the economy. The move would coincide with the milestone of the administration’s first 200 days. Allowing workers to withdraw from their severance fund (BRL 40bn) and releasing money from a workers’ social contribution fund (BRL 21bn) could amount to a capital injection exceeding BRL 60bn.

Why it matters. The Brazilian economy has struggled mightily to leave recession mode. After Q1 2019, GDP shrank 0.2%—and there is no strong reason to believe that Q2 results will be very different. Albeit a quick fix, putting money into the hands of families could help citizens cut down their debts and start consuming more. The retail sector, for instance, has posted negative results over the past two months. In a country where household consumption is such an important factor in GDP, this is a problem. Construction companies are fuming, however, as the workers’ severance fund money is also used to finance infrastructure and housing projects.

Some economists believe the move could break the vicious cycle of slow growth. A similar effect occurred in 2017, when the Michel Temer administration also injected BRL 44bn in the economy through withdrawals from the severance fund. That helped Brazil get achieve 1% GDP growth that year, after two negative years. 

However, the move alone will clearly not yield a sustainable impact on the economy: it would need to be accompanied by reforms (like a tax system overhaul) and investment-fostering moves, such as infrastructure projects. 

House begins unofficial holidays. What’s next?

The Brazilian lower house has not yet approved the budgetary directives law for next year, meaning that lawmakers cannot yet take their July vacations. But congressmen will use a loophole to leave Brasília, by simply not scheduling deliberative sittings for the next couple of weeks. So here’s what will be on the House’s plate when it sits again:

  • Pension reform. The House has held only the first of two rounds of votes on pension reform. Speaker Rodrigo Maia expects the second round to take place in the first week of August. In order to approve it and pass it up to the Senate, at least 60% of lawmakers must support the bill.

  • New law for public bidding processes. The core of the bill establishing new rules for public bidding processes (which includes harsher penalties for fraud) was approved in June. However, 23 amendments to the bill must yet be voted on. The new law would simplify the hiring of goods and services by public administration; it has been welcomed by some in the private sector.

  • Tax reform. A Special House Committee was established on July 10 to consider tax reform. The House presented its own version of the reform, focusing more on simplifying the tax code than on lowering them. The government will present its own proposal, which could be merged with or replace the existing one. That will depend on negotiations between the administration and Congress.

  • “Economic Freedom.” A decree known as the “Economic Freedom” bill is to be voted on by the House floor before heading to the Senate. Among other moves, it would aim to cut down bureaucracy for small ventures.

The government’s privatization plans

Jair Bolsonaro’s economic team is preparing to announce the details of its ambitious privatization plan in the next few weeks. It is still deciding on how to overturn the notion that selling off state-owned companies is detrimental to the country’s interests. The government may even consider rebranding the term “privatization”—considered a dirty word by many.

Why it matters. Estimates suggest that a plan to privatize state-owned enterprises and to grant concessions on public services to private initiative could help raise BRL 450bn. Even if partially only executed, it would represent a reshape the Brazilian economy—for better or worse. The Brazilian economy is still relatively state-dominated: the country has 418 publicly-controlled companies, 138 of which are federally-owned. This is more, in absolute terms, than any other Latin American country.

While resistance to privatizations has crept downwards over the past few years, a majority of Brazilians are against losing control of state-owned companies—especially the Crown Jewel, Petrobras. According to political scientist Alberto Carlos de Almeida, privatizations are negatively perceived by poorer Brazilians—who depend more on the state. In wealthier areas, the state plays a lesser role, so voters would prefer smaller-state policies—so goes the argument presented in the book O voto do Brasileiro (“The Brazilian Presidential Elections”).

Also noteworthy

Ethanol. Forty years ago, Brazil saw the launch of the first ethanol-fueled car in the world: a Fiat 147 model. The car was nicknamed “Cachacinha,” due to the alcohol scent it pumped out. Sugarcane-based ethanol was developed in a state-backed program by the military dictatorship as a response to the 1970s oil crisis.

Right-washing? The government has changed the content of an exam that aspiring diplomats must pass, scrapping questions related to economic policy in the Workers’ Party’s era. The move was controversial among educators responsible for preparing applicants, with some saying that it should be essential to test knowledge of Brazil’s economic history of the past 20 years. Others, however, said it would avoid the possibility of results being contested, as questions about recent events are less based on an established consensus.

Uncertainties. A new report by a consultancy, Tendências, tries to show how uncertainty over the direction of public policies and economic management bears certain costs. Last year, that cost would have been BRL 40bn, as investors ran for cover amid a tense and polarized presidential election—as well as the May 2018 truckers’ strike, which nearly brought the country to a halt.

Parties. The center-left Democratic Labor Party (PDT) has temporarily suspended the eight congressmen that broke ranks and voted in favor of pension reform, until it decides on a course of action, which can range from a simple warning to expulsion from the party. It’s worth noting, though, that the party has not adopted such a harsh stance against members suspected of illegal activities. Chairman Carlos Lupi, for example, has faced criminal investigations for corruption.

Infrastructure. The São Paulo state government plans to invest around BRL 1.7bn to expand São Paulo’s metro. A project to build a sixth underground line was stopped two years ago, after member companies of the consortium responsible for construction were investigated under Operation Car Wash and were unable to secure loans from public banks.

Confidence. Six months into his first term as an elected official, Rio state Governor Wilson Witzel said “it is only a matter of time” until he becomes president of Brazil. Since he took office, in January, Rio’s murder rate has gone down 25% compared with the same period last year. However, this appears to have come at a cost of a 20% increase in murders by police.

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