The week ahead in Brazil #45

What is happening in Brazil?

1. On Monday (15), Justice Edson Fachin, of the Federal Supreme Court (STF), reacted to a revelation made by general Eduardo Villas Bôas, a former Brazilian Army Commander, in his book. Mr Villas Bôas said his tweet in 2018 was to alert the STF over the consequences of judging a habeas corpus of the ex-president Lula, who was arrested over corruption charges.

Justice Alexandre de Moraes ordered the arrest of federal deputy Daniel Silveira (PSL-RJ) on Tuesday (16) night. On Wednesday (17), the STF unanimously confirmed Mr Moraes’ decision. A close ally of the Bolsonaro family, Mr Silveira was accused of threatening and attacking the STF justices and of inciting anti-democratic acts in a 19-minute long video posted on YouTube. On Friday (19), as prescribed by law, the Lower House approved by 364 to 130 votes that Mr Silveira should be kept in jail, and he will face a legislative inquire that could end his term.

The Federal Senate’s permanent committees will begin their functioning on Tuesday (23). The Senate’s president, Rodrigo Pacheco (DEM-MG), the speaker of the Lower House, Arthur Lira (PP-AL), along with the Ministers of Economy and Government, announced that the Senate is likely to assess the Constitutional Amendment Proposal (PEC) 186/2019 next Thursday (25). Named “Emergency PEC”, the bill is aimed to improve the fiscal balance and is part of the structural reforms.

2. After Petrobras readjusted fuel prices, the government decided to zero the federal taxes on diesel for two months as from March. Petrobras announced that diesel prices would increase by 15.2% and that of gasoline by 10.2%. President Jair Bolsonaro criticised the decision, causing a drop in Petrobras’ shares. Banks estimate an impact on the inflation rate.

Valor published an interview with the new British ambassador to Brazil, Peter Wilson. Mr Wilson said the UK seeks a ‘deep, wide partnership’ with Brazil.

3. Following his remarks over the increase in fuel prices, Mr Bolsonaro said something “has to happen” at Petrobras in the next couple of days. On Friday (19), he announced Joaquim Silva e Luna – a retired general currently director of Itaipu, the giant hydroelectric power plant – as the new CEO of Petrobras. Mr Bolsonaro said more changes would occur in the energy sector, possibly referring to Eletrobras.

On Friday (19), a group of state governors said they would pursue ways of acquiring Covid-19 vaccine directly from manufacturers. The decision was taken after asking for a vaccination schedule in a meeting with the Minister of Health, Eduardo Pazuello, on Wednesday (17).

How to read it?

1. This week, the effect of politics on public policies is tricky, but it remains positive according to our metrics. I reached that conclusion assessing the level of conflict, the relationship between the government and Congress and the government’s approval ratings.

While the STF was involved in much of the conflicts, the government did not create tension in either cases, and Mr Bolsonaro remained silent, preventing any form of escalation. He did not criticise STF’s decision, did not come publicly to the rescue of lawmaker Silveira nor stimulated demonstrations of support to Mr Villas Boas’ revelations as would be expected. The approval ratings are reasonably stable, but slightly decreasing.

The most important evidence for the political analysis came from the Lower House, as Mr Lira found a delicate balance on how to deal with the Silveira situation while keeping his eyes on the government agenda. Mr Lira crafted a political solution with Mr Bolsonaro and political leaders to end it quickly and to put forward the government’s priority list. This is positive and it is another demonstration that they see eye to eye on many issues.

2. The economy is in neutral mode. This week’s developments could lead initially to a negative reading, but this was not the case.

First, because the Brazilian Central Bank has monetary instruments to properly run the economy in the case of a consistent increase in inflation. A change in the Selic rate in March is possible and would eventually avoid the potential increase in inflation rates.

Second, because the change in Petrobras’ top leadership relates immediately to the management part of the government and to the attractiveness of the country and its assets to investors. As a public controlled enterprise, Petrobras has more complex targets to achieve if compared to a private company. Apart from the financial and operational results, it has also a decisive role in the national interest, an abstraction ultimately decided by the government, more related to strategic and social impacts. As Petrobras is well known to have established good governance and compliance programmes, especially after the “Car Wash” operation, it is unlikely that this leadership change will have a lasting negative impact on the economy. It signals that Mr Bolsonaro has a propensity to interfering in public companies, much more than selling them or letting market professionals run them, which is not a new element in our analysis. It was not the first time he does something like that and it won’t be the last.

Third, the government’s decision to zero the federal taxes is worrisome, but, as well as the new emergency aid – on which there seems to have a consensus over its necessity -, the government will have to find budget compensation solutions to fund both initiatives. The alternatives, as mentioned before, are either to increase the public debt or to privatise companies. While the latter seems far from reality, despite Mr Guedes’ will, the former remains a more likely option.

Lastly, some analysts implied the government would be financially tying the concession of the new aid to the approval of the “Emergency PEC”, but that does not seem the best assessment. The spending with the new financial aid is immediate, while the likely effects of the PEC tend to be medium to long term. It is more plausible that the government is politically connecting both initiatives.

3. The public management factor has not changed, remaining neutral. It is a government’s prerogative to indicate professionals to lead Eletrobras and Petrobras. The frequent nomination of military officials to run ministries or public-controlled companies has been heavily criticised by specialists. Most assessments from public management analysts agree that despite their preparation and high standards, they are not technically formed to perform such roles. It gives the impression that they were chosen mostly due to their blind obedience and allegiance to Mr Bolsonaro.

The government lacks innovation overall, and the main problems remain concentrated in the domain of Environment and, obviously, Health. Other areas of the government, however, run well, such as Agriculture and Infrastructure.

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