The week ahead in Brazil #34

Short term

What is happening in Brazil?

1. In an interview, Fábio Faria, the Minister of Communications, made several political assessments. Amongst the most important, Mr Faria said that president Jair Bolsonaro was not defeated in the municipal elections as some say; that the government will not engage in quid pro quo practices with Centrão parties; that the government has the legitimacy to support any contenders to run for the presidency of the Lower House, and showed an inclination towards deputy Arthur Lira, a representative from PP, one of the Centrão parties.

A corruption inquiry against Mr Lira were revealed on Thursday (3). It is related to a kickback scheme (rachadinha), where political staff return part of the salary to their bosses (politicians). It occurred between 2003 and 2006, when he was a state lawmaker in his home state, Alagoas. He was found guilty but was considered innocent on the next day (4) due to a judicial procedure of collecting evidence. These accusations are similar to those faced by senator Flávio Bolsonaro related to when he was also state lawmaker in Rio de Janeiro.

The Federal Supreme Court (STF) is analysing the possibility of the re-election of the presidents of the Lower House and the Senate during their current mandates, which is prohibited within the same Legislature by the Federal Constitution. The election will occur in February 2021.

2. On Monday (30), the Minister of Economy, Paulo Guedes, announced the privatisation plan for 2021 and 2022. After a meeting of the Investment Partnership Programme Council (PPI) with President Jair Bolsonaro and other members, Mr Guedes envisages selling several federal companies in 2021, including Correios and Eletrobras. The government included 58 federal assets to be offered for concession and 115 other assets for auction.

Brazil registered a GDP high record of 7.7% in the third quarter, driven by industry and commerce, with some contribution from the emergency aid. The economy rebounds from a record decrease in the second quarter of 9.7%. Overall, the international press was more positive with the figures (FT and Reuters), while the Brazilian press adopted a more cautious tone (Folha, Estadão and Valor), with headlines stating that the result was lower than that expected by the market.

3. The Ministry of Education (MEC) released a decree on Wednesday (1) determining the return of presential activities in private and public universities as from 4 January 2021. After facing intense criticism, MEC revoked the decree on the same day. Brazil has 8.6 million university students, out of which 6.5 million are enrolled in private universities.

Brazil’s space agency (Inpe) informed that deforestation under the Bolsonaro administration peaked a 12-year high, growing 9.5% from last year (August to July). The figures show that 18% of the Brazilian territory were burned at some point over the previous twenty years showing a rise in 4% year to year.

How to read it?

1. The political scenario is less favourable than last week. While there was no institutional conflict and the approval ratings of the Bolsonaro administration remain high, the municipal elections and the issue of the re-election of the presidencies of both legislative houses create a disturbance in the soundness of the coalition.

While deputy Rodrigo Maia is considered as a more independent actor in relation to the government, senator Davi Alcolumbre is taken as an ally. This explains why the government is trying to prevent the re-election of Mr Maia, or the election of any of his allies, to lead the Lower House. The government’s candidate is most probably Mr Lira. In a scenario where Mr Maia or one of his allies win the elections, the government will have a more difficult time to approve its structural reforms or to increase taxes, but privatisation of state-owned companies could advance. In another scenario, where Mr Lira or a government-backed candidate becomes the new president of the Lower House, the Executive is likely to have more space to pass its projects, but privatisation of public companies will be more difficult, and the government will have a trajectory of increasing its size, adding fiscal pressure.

2. Fundamentally, there was no change in the fiscal scenario so far. Critical uncertainties remain, especially those related to the renewal of the emergency aid, to the future social programmes and to the plausibility of passing the structural reforms. On top of that, there was the announcement of selling public-owned or controlled companies, which is good news. However, it is not the first time the government makes a statement over the issue, and was not able to deliver.

Despite that, the strong GDP recovery of the Brazilian economy was definitively positive. Some reports highlighted that the economic result was below some market’s expectations. Yet, in comparison to other countries, the figures are positive and were better than in the US, Japan and China, while worse than in Germany, the UK, Italy and Canada.

3. The public management factor continues to be a negative factor in the policymaking process. The case of the decree to return to presential activities in universities was a fiasco from the Ministry of Education, as it reveals a lack of strategic direction in its core activities.

Furthermore, the mismanagement condition in the Ministry of Environment was revealed by substantial evidence that it is failing to reduce deforestation.

Update at 11:00pm: The Federal Supreme Court (STF) decided to rule out the possibility of re-election of Mr Maia and Mr Alcolumbre. In that case, in the Lower House, Mr Maia will try to make a successor against the group headed by Mr Lira. In the Senate, the scenario will be clearer next week, but the MDB party will be at the centre of the negotiations.

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