Bolsonaro Administration: First words, first acts

What can Brazil expect from the new Bolsonaro Administration when it comes to economic policy? Plenty. Perhaps the most telling indication came from the fact that the new Economy Minister, Paulo Guedes, spoke for 50 minutes after taking the oath of office while the President spent only ten. Not only that—Guedes didn’t dwell on generalities; he spelled out the government’s economic priorities. They are, in descending order of importance: pension reform, privatization, foreign trade liberalization, and tax simplification. Guedes, and aides, even offered details—the administration will send a pension proposal to Congress in February, incorporating some aspects of the reform proposed in 2016 by former President Michel Temer while adding others; trade liberalization will be gradual; privatization and concession auctions will be scheduled quickly; and tax simplification will be part of a new “national pact” designed to make government accounts sustainable. More details followed in the days after the inauguration. Guedes, for example, said the administration will pursue additional labor code liberalization designed, as he described it, “to bury the fascist-era labor laws still on the books.” In a reversal of campaign rhetoric, Mines and Energy Minister Bento Albuquerque said privatization of the Eletrobras utilities holding company is back on the table. Bolsonaro himself, in a statement, said the administration will speed up existing concession sales for railroads, airports and ports, with the first auctions scheduled for March. He estimated the likely take for government coffers at R$7 billion. Guedes, meanwhile, offered a hint of the administration’s political strategy, saying failure by Congress to adopt a meaningful pension reform would force the government to cut spending in vital areas such as health and education. Guedes also outlined some of the government’s tax reform plans, embracing the idea of eliminating whole classes of taxation, focusing on a single value-added tax and redistributing revenues to bolster state and municipal finances. The ultimate goal, he added, is to reduce Brazil’s tax burden from the current 32% of GDP to about 20%. The new administration’s first act, largely symbolic, was to scale back this year’s increase in the minimum monthly salary, choosing a 4.6% hike to R$998 rather than breaking the R$1,000 barrier as proposed by Temer in his tentative 2019 budget. In another symbolic action, the government fired 300 political appointees in the federal hierarchy as part of a plan to streamline government. Subsequent executive actions in January, ahead of the congressional session due to convene early next month, are likely to include measures reducing trade bureaucracy and business regulation. Bolsonaro summed up his administration’s main theme in brief remarks before Congress, saying: “We will replace the entanglements of ideology with respect for markets.”

Brazil-U.S. Business Council

The emerging shape of the new administration

Can the incoming administration of President-elect Jair Bolsonaro lead Brazil out of the doldrums? Bolsonaro offered some clues this week. One clue—he acted quickly.

Lack of details keeps banks cautious about Bolsonaro’s plans

Despite the financial market’s initial euphoria with the first-round results of the elections, executives at retail banks are cautious about a possible administration of Jair Bolsonaro (Social Liberal Party, PSL). They consider that, even though the candidate’s proposals for the economy point to the direction they consider correct, there is still little clarity about how they will be implemented.

Mr. Bolsonaro has the benefit of the doubt, even because the sector rejects the economic policy adopted in the administration of Dilma Rousseff, who is of the same Workers’ Party (PT) of runoff contender Fernando Haddad. Yet six bankers who spoke with Valor — especially those linked to the lending market — expect more details of the measures and reckon the real economy will take time to react in a more consistent way.

Inflation trending higher amid stronger dollar, oil prices

Some economists already expect inflation to come in slightly above the target this year due to the effect of a stronger dollar on the real and higher oil prices. The Brazilian Institute of Geography and Statistics (IBGE) reported Friday a 0.48% rise in official gauge IPCA in September, following a 0.09% decline in August. The index advanced 4.53% in the 12-month period ending in September, while the Central Bank’s official target is 4.5%. Itaú Unibanco says the weaker exchange rate is affecting wholesale prices more intensely and may put additional pressure on consumer prices over the next few months.

IPCA up 0.48% highest rate since September 2015

The IPCA inflation index closed the month of September up 0.48%.
In 12 months the IPCA rose 4.53%, higher than the 4.19% up to last month. The expectation was for a rise of 4.45%. This year's inflation target is 4.5%, plus or minus 1.5%.

What the Rating Agencies are saying about Brazil

Two unusual developments emerged recently in the often fraught relationship between Brazil and the big three international credit rating agencies; first, the agencies are in rare agreement about Brazil, and; second, they are saying mostly nice things about the country.

Foreign investors bet on future but cut exposure to short-term assets

With two weeks before the presidential election, foreigners show confidence in the Brazilian economy’s future but are nervous about the short term. Figures show that in August the country received $10.6 billion in direct investment, one of the ten best monthly performances since the launch of the Real Plan in July 1994 — in the 12 months through August, investors injected $70 billion in Brazil. Meanwhile, short-term fixed-income and equity investments saw last month the largest capital outflow in almost four years. In fixed income, net outflow reached $7.75 billion; as for equities, investors have already withdrawn $1.88 billion in September.