The week ahead in Brazil #22

Short term trends

What is happening in Brazil?

1. Next week, political arrangements can be made to extend a fiscal benefit to 17 sectors until the end of 2021. The government is willing to accept that congress members overturn the presidential veto on payroll-tax cut in exchange for the approval of the structural reforms and the Constitutional Amendment Proposal that reforms the federative arrangement.

Meanwhile, the Minister of Economy, Paulo Guedes, said he would step aside from political negotiations with the Legislative. Last week, Rodrigo Maia, the speaker of the Lower House, said Mr Guedes was no longer his point of contact.  Mr Guedes affirmed he will focus on the policymaking from now on, as the government has a sound and structured political support.

Mr Maia said the “fake news” proposal is likely to be voted this year, sooner than the “administrative reform”.

Mr Bolsonaro travelled twice this week. Once to Rio de Janeiro for a Navy event, and to Bahia, to celebrate the expansion of 18km of railway.

2. According to specialists, the monetary policy is having a positive impact during the pandemic. However, an adverse fiscal scenario is providing a growing risk to the wider economy. One derives from the overturn of the presidential veto mentioned above will cost R$10bn (£1.4bn) to the government. Instead of paying a fixed 20% in taxes to the pension of employees, companies want to keep paying a variable amount, attached to their income. The other is whether Mr Bolsonaro will sanction a pardon of R$1bn (£137m) in debts from churches. Third, the government is planning to expand its social programmes.

Mr Guedes said the administrative reform aims to save R$300bn (£41bn) in the next ten years.

The recent spike in food supplies, such as in rice, is a matter of concern for the government. Government officials say it is a temporary movement, but the government zeroed import tariffs to avoid inflation, just in case.

3. On Saturday (12), Vice-President Hamilton Mourão claims the government is doing what it can to fight fires in the Amazon at CNN and at the Lower House the day before. Reports, however, indicate that the Ministry of Environment is mishandling the situation.

Despite the decrease in numbers related to infections and deaths by Covid-19, the Ministry of Health continues to show no sign of a clear strategy to tackle the pandemic.

There was a cut to the budget of Embrapa, the Brazilian company in charge of agriculture research. The institution claims crucial activities might be interrupted.

The Minister of Infrastructure, Tarcísio Freitas, is preparing a regulatory overhaul. Mr Freitas said his team will revise over 900 norms that might simplify the decision-making process, shortening unnecessary bureaucracy.

How to read it?

1. The political trend continues its positive trajectory. The tension between Mr Maia and Mr Guedes is unlikely to escalate into a conflict that could compromise essential measures. It does not mean that both structural reforms are bound to be approved this year, but it means the Lower House is not aiming to push for harmful economic policies.

As Mr Guedes has stepped aside from political negotiations, the burden on the Minister of Government Luiz Eduardo Ramos will increase. While he is from a military background, he is regarded as a good political negotiator. Mr Guedes fears that other ministers and lawmakers take advantage of that to press for more expending.

2. The economic trend keeps neutral. Mr Guedes continues to push for the structural reforms. The GDP contraction is also worrying but it was expected.

The fiscal situation is daunting. So far, the income of new revenue, either from the selling of public companies or from new tax, remains unheard of. On the expending side, the increase generated from the emergency payments has its share of fiscal downsides, but it seems to be a consensus that it was necessary.

As stated last week, the integrity of the constitutional spending cap, the fiscal ceiling, remains the most relevant challenge of the government. It has been preserved so far. While Mr Guedes was aware of its importance, other stakeholders might feel different.

3. The Covid-19 numbers in Brazil have been decreasing, which is good news. It is not clear what has been the role of the Ministry of Health in combating the pandemic. At the Ministry of Environment, the pressure to deliver better policies for the Amazon region was ineffective so far. The shortage of funds to Embrapa is also a matter of serious concern.  

The good news from the Ministry of Infrastructure sets the short-term trajectory to neutral, after a long sequence in negative. It can provide public management with a better situation to increase the overall productivity, setting an example to other areas.


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