The week ahead in Brazil #26

Short term trends

What is happening in Brazil?

1. On Monday (5), President Jair Bolsonaro had breakfast with Deputy Rodrigo Maia, the Speaker of the Lower House, with Senator Marcio Bittar, the rapporteur of the budget and of the Constitutional Amendment of the Federative Pact, and other ministers. The topic was to discuss the “Renda Cidadã” and the reform agenda. On the same day, Mr Maia and Paulo Guedes, the Minister of Economy, made amendments at a dinner with other political actors. They said they are committed to advance on the new social programme and the structural reforms. On Thursday (8), Mr Maia and Mr Guedes announced the will to advance on the administrative reform in the next couple of weeks.

Mr Bolsonaro said on Wednesday (7) he “finished” the Car Wash probe, known as “Lava-Jato”, because there is no more corruption in the government. He travelled to São Paulo and the state of Pará this week.

There were expectations that Senator Bittar would disclose how to fund the “Renda Cidadã”, but it did not happen. He announced it would be presented after municipal elections, which are scheduled between 15 November and 29 November. Senator Roberto Rocha, the president of the joint committee on the tax reform, said a reform proposal is unlikely to be voted this year.

The Senate will have an informal recess until 18 October, and another from 26 to 30 October. The Minister of Environment, Ricardo Salles, will take part in a public hearing over the Pantanal fires on Tuesday (13).

2. A report from the International Monetary Fund – IMF about Brazil summarised in sixteen points the current fiscal and monetary outlook in Brazil. According to it, the economy was prepared for a good start until the effect of the pandemic caused more spending and capital outflow. Despite those problems, the government’s response was essential to prevent further problems in job losses and market stabilization. It points that Brazil faces high-multifaceted risks, projecting a decrease in 5.8% for this year’s GDP (it was previously 9.1%) and a sharp increase in the fiscal deficit and public debt, raising concerns over fiscal sustainability. The IMF stressed the importance of preserving the expenditure ceiling and advancing on structural reforms, and mentioned Brazil’s strengths, such as international reserves and a resilient banking system.

In another report, The World Bank forecasts a decrease of 5.4% of Brazil’s 2020 GDP. The previous forecast was of 8%.

The funding of “Renda Cidadã” and the outcome of the structural reforms remain uncertain.

3. On Thursday (8), there were rumours that the Ministry of Economy could be split to create another two ministries: one of Pensions and Labour, and another of Trade.

Mr Bolsonaro appointed Jorge Oliveira, to become a minister of the Federal Courts of Account (TCU) in 2021. The Senate must approve Mr Oliveira.

The Minister of Health, Eduardo Pazuello, affirmed that, before coming to work in health, he did not really know how the “Sistema Único de Saúde” (SUS) functioned. SUS is the NHS-inspired Brazilian public health programme.

How to read it?

1. The municipal elections, the definition of heads of some of the legislative committees and succession of the presidency of both houses constitute a substantial political effect. The government also has an interest in those outcomes, but its main objectives are others, such as the approval of structural reforms, potential pillars of a better economy. It is within that context that the joint declaration of Mr Guedes and Mr Maia gains importance, moderating the importance of other political actors that were pushing for more spending. The most prominent of them is the Minister of Regional Development, Rogério Marinho, but he is not alone.

It is plausible to expect the next week to be of political negotiations over the reforms. One point of concern is how Senator Davi Alcolumbre, the president of the Senate, will act upon the rising importance of Mr Maia and other actors who have joined negotiations over the reforms and “Renda Cidadã”, such as Senator Renan Calheiros, one of the savviest political actors.

Despite this uncertainty, the political trend remains encouraging. The government and the Legislative are not in institutional conflict. Despite his remark on the “Lava-Jato” operation, the popular support to the Bolsonaro administration continues high. The presidential coalition is strong and has not changed.

2. The economic trend remains neutral. From last week, the political negotiation over the fiscal policy seems to be in a better position. The monetary policy continues without drastic changes.

From an isolated analysis, the cumbersome announcement of the “Renda Cidadã” certainly would look a greater risk to the fiscal scenario. However, the positive trend in politics was able to resist the proposal of funding it with precatórios or other troublesome financial sources. The relevance of the role of the Ministry of Economy also seems to be reinstated.

Week after week, I’ve been classifying the economic trend as neutral, because the government is in a deadlock: able to hold the increase in spending so far, but also unable to unleash more revenue. It will come a time, however, that if the Bolsonaro administration is unable to cut spending (i.e. by merging social programmes or by cutting ineffective public policies) or to increase its revenues (by selling companies or approving structural reforms), a dreadful fiscal problem will be a more plausible scenario.

3. The government had to retrocede from the “Renda Cidadã” announcement in its original form. It was a demonstration that the decision-making process requires further fine-tuning. Despite that and rumours to split the Ministry of Economy, Mr Guedes’ leadership seems to be in order, and that is the main reason why the public management trend is coming back to neutral.

The declaration of Mr Pazuello about SUS was unfortunate, even if he intended to praise SUS. The appearance of Mr Salles on Tuesday (13) will be a chance for him to explain numbers and actions on the environmental front.

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