By Yigal Chazan*
Just over a year into his term in office, far-right Brazilian president Jair Bolsonaro’s illiberal views have continued to fuel controversy – yet his economic policies appear to be bearing fruit. Latin America’s largest economy, long in the doldrums, has witnessed a surge in foreign direct investment despite mounting investor concern over Bolsonaro’s environmental track record.
A former army captain with sympathies for Brazil’s former military dictatorship, Bolsonaro, nicknamed the ‘Trump of the Tropics’, remains the bane of his political opponents and activists. US-based Human Rights Watch has railed against “anti-rights” policies, which, it says, are hurting many Brazilians, from the LGBT community, indigenous groups to poor people fearful of police violence. But the president’s provocative populism, which has sparked occasional diplomatic spats, masks a more uplifting economic story.
Driven by Bolsonaro’s economy minister, Paulo Guedes, a committed free marketer, an ambitious reform programme is taking shape, featuring deregulation, privatisation and fiscal belt-tightening. That, along with plans to bolster infrastructure investment and negotiate free trade agreements, has seemingly begun to restore investor confidence. In fact, the sluggish economy is already showing signs of recovery, following several years of recession that resulted from a fall in commodity prices, after a sustained boom, and was exacerbated by mismanagement and administrative corruption.
In the last year FDI rose by 26 per cent to $75 billion in part driven by a spate of privatisations of state-owned enterprises which are expected to continue this year, including the sell-off of the country’s largest utility Electrobras. Investors will have also warmed to a much-delayed overhaul of the country’s overly generous, budget-devouring public sector pension system – which raised the retirement age for both men and women – and a series of other planned reforms.
On the agenda is a simplification of a complicated tax system and a shakeup of the bloated state sector – including cuts to benefits and salaries and automatic austerity measures for overspending authorities. It could go some way to improving both the deficit-racked economy and the business environment. While welcomed by investors, they are not entirely comfortable with Bolsonaro’s direction of travel, particularly when it comes to the environment.
Bolsonaro has little truck with the green lobby, seeing economic development of the Amazon as an important contributor to Brazilian prosperity. During the president’s term, enforcement of environmental laws has been undermined. Critics maintain that he has encouraged cattle farmers and loggers to clear more of the rainforest. With the authorities accused of looking the other way, fires have raged across the Amazon over the past year, leading to a big increase in deforestation.
Some investors, including asset managers, pension funds and international companies, have been alarmed at the destruction. In September, 230 funds representing about $16.2 trillion under management urged firms to guard against their supply chains being tainted by deforestation. Fitch Solutions had earlier warned that international concern “will create headwinds to export demand and investment inflows”.
Investors are not only keeping a close watch on Amazon clearances. They will be keen to see whether Bolsonaro will fulfil his pledge to restore the country’s finances and improve the business environment. But the president’s reformist ambitions could well be tempered by congressional opposition and fears that the changes may stir public unrest.
While the overarching aim of the reforms is to rein in spending and boost foreign investment and jobs, in the short term they threaten to unravel the undoubted social gains made under the former leftist administration of Luiz Inacio Lula da Silva. Indeed, the pension overhaul had long been contested. And Bolsanaro, who as a Congressman was not a strong reform advocate, might not want too much change, too soon.
The president will be acutely aware of the recent fate of centre-wing governments in the region. In the Argentina, a reform-minded president, Mauricio Macri, suffered electoral defeat at the hands of Peronists after his market-orientated policies failed to revive the economy that required a massive IMF bailout to stay afloat. In Chile, protests over rises in metro charges in the capital Santiago morphed into nationwide demonstrations against inequality, prompting President Sebastian Pinera to declare a state of emergency.
Late last year, Bolsonaro postponed the planned state sector shakeup, betraying worries about a possible public backlash. A dispute over pay several years ago led to tens of thousands of civil servants going on strike. And the prospect of a repetition has been raised by the recent release from prison of ex-president Lula, who has the potential to mobilise the opposition. Charged with corruption, he was freed with many other inmates awaiting appeals in a controversial move by the Supreme Court.
Twelve months into his presidency, Bolsonaro does appear to be making headway economically. The year began with encouraging news, including the FDI boost and a spike in employment figures for 2019, though joblessness remains high at around 11 per cent and anti-poverty efforts have been flagging. Nonetheless, the president’s handling of the economy – growth is expected to double in 2020 to just over 2 per cent – and moves to cut crime and corruption have seen a bounce in personal approval ratings, despite his family and administration being overshadowed by scandal.
With important municipal elections coming up in October, the mid-point of Bolsonaro’s presidential term and effectively a referendum on his performance, he may be reluctant to forge ahead with unpopular reforms. And the time available for passing significant legislation ahead of the ballot is limited, as campaigning begins this summer. Moreover, his new party the Alliance for Brazil – he ditched his former Social Liberal Party after falling out with members – will be counting on support from Christian Evangelists, who might be keener on him promoting populist, socially conservative policies in the run up to the polls.
It all presents a degree of uncertainty for international investors. They will have been buoyed by Bolsonaro’s initial willingness to embrace reform. But should the opening-up of the economy and restoration of public finances falter and the Amazon fires spread, the foreign investment honeymoon the government is enjoying could be short-lived.
*Yigal Chazan is the head of content at Alaco, a London-based business intelligence consultancy.
The views expressed in this article are those of the authors alone and do not necessarily reflect those of Geopoliticalmonitor.com or any institutions with which the authors are associated.