The Week Ahead in Brazil #48

Short term trends

What is happening in Brazil?

1. The Federal Supreme Court (STF) justice Edson Fachin overturned the criminal convictions of Brazil’s former president Luiz Inácio Lula da Silva on Monday (8). The decision ruled that the court in the city of Curitiba did not have jurisdiction over Lula’s case, and the merit of the accusations was not examined. The decision still has to be confirmed by the STF. On the next day, justice Gilmar Mendes concluded that Sérgio Moro, the former judge who led to Lula’s conviction, was partial on his ruling. Although Lula is being prosecuted in several other inquiries, in practice, it means the former president is no longer a convict, which allows him to run in the 2022 elections.

Following STF’s decision, on Tuesday (9), Lula made a 2.5-hour political speech where he criticised all aspects of the Bolsonaro administration – particularly the public management response to the pandemic and the economy –, federal prosecutors who charged him, the former judge Moro and the press coverage during his trial. He did not state he will run for the presidency in 2022, but he affirmed the will to have political talks across Brazil to build a broader alliance to defeat Bolsonaro.

Later on Tuesday (9), Bolsonaro and all his ministers appeared using masks to enact three bills that facilitate the acquisition of vaccines. He used a moderate tone in his speech. Senator Flavio Bolsonaro (Republicanos-RJ) promoted vaccination on his Twitter account. However, on Thursday (11), Bolsonaro returned to his usual mode: no masks and criticism of the restriction measures decreed by governors and mayors.

The Lower House approved the “Emergency PEC” on Friday (12). The bill was partially watered down by some changes, such as the prohibition of the progression and promotions of all public servants. The president of the National Congress, senator Rodrigo Pacheco (DEM-MG), will enact the constitutional amendment on Monday (15). The Lower House also concluded the nomination of all its 25 permanent committees. The government has a majority in most of them, including crucial ones such as the Constitution and Justice Committee or the Tax and Finance Committee.

The latest XP/Ipespe poll shows a change in the government’s ratings. While the approval ratings are stable at 30% (month to month) at the same level of the beginning of the pandemic, the disapproval increased from 42% to 45%, mostly related to the pandemic management and to the economy, a ten point difference if compared to March 2020. The survey shows governors have an approval rating of 35% and a disapproval of 28%.

2. The approval of the “Emergency PEC” will have a lower impact on the economy, as it will not only allow the progression and promotion to military personnel, but to all public servants. Despite that, it paved the way to a limited R$44bn (£5.69bn) pandemic aid and established additional fiscal rules.

The Brazilian Central Bank extended a lower compulsory deposit requirement at 17%. The decision has effect until November and can inject up to R$40bn (£5.17bn) into the economy.

Next Wednesday (17), the Monetary Policy Committee (Copom) of the Brazilian Central Bank will decide over the Selic rate, Brazil’s benchmark interest rate. Considering the inflation expectations and the Real devaluation, market analysts expect a rise from the current 2% to 2.25/2.50%. If confirmed, it will be the first increase in 6 years. The food inflation in Brazil increased 19.4% in 12 months, the highest in 18 years, resulting primarily from a spike in the commodities’ price and the dollar appreciation.

3. The Minister of Health, Eduardo Pazuello, should soon be replaced. Bolsonaro decided to make the change due to the poor results in the response to the pandemic. There are other factors as well, such as the constant changes in the vaccine rollout, the Centrão pressure and the intense criticism from governors and mayors.

Upon his return from the official mission to Israel, Fabio Wajngarten was dismissed as Secretary of Communication. His interim replacement is Admiral Flavio Rocha, Secretary of Strategic Affairs. Bolsonaro said Wajngarten “did not respect hierarchy.”

Luciano Huck, a popular TV host with presidential ambitions, published an article on the FT criticising the climate change policy of the Bolsonaro administration.

1 £1.00 = R$7.73

How to read it?

1. The political analysis of this week has had numerous inputs to be processed. Overall, the political scene remains favourable to the policymaking process, even with the Lula factor.

First, despite the STF’s decision related to both Lula and Moro and Lula’s speech, Bolsonaro did not attack the Judiciary nor criticised left wing parties in the Legislative power. However, after a brief moment of complying with the good practices to avoid the spread of Covid-19, Bolsonaro aimed again at governors, attacking their restriction measures.

Second, there are two main points over the presidential coalition in Congress. One is that parliamentary support in crucial committees turned out favourable or neutral to the government’s interests, which is important to control the agenda and secure votes to pass important bills. This will require Bolsonaro to concede more space to the different political groups in the government. Another point is that the dehydration of the “Emergency PEC” was expected in a congress with a strong bias in favour of public servants. Furthermore, Bolsonaro supported leaving out the military and police personnel out of the deal. However, most lawmakers are also elected by public servants and decided to take out all categories of public servants from the bill. By doing that, congress members equalised the advantage Bolsonaro and politicians elected by the military would have over them.

Third, the numbers in popular support show Bolsonaro’s base remains solid. However, the pandemic and the economic effects are impacting the federal government’s image far more than that of state governors. This is puzzling, because the more Bolsonaro tries to pin on the governors the pandemic’s problems, the more he is perceived in a precarious way.

Lastly, there is the “Lula factor” in politics. Most political analysts say Lula will be a candidate in 2022, and he is acting like one. Nonetheless, there is a long road to 2022 to affirm that Lula is a viable candidate and even more to say he could win the elections. What really matters about Lula’s somewhat rehabilitation is that he has an advantage over Bolsonaro in several aspects, as he has more administrative and political experience, an international appeal, a vision for the country, and both popular and businesses support. Moreover, Lula represents a meaningful opposition to the government and might become an agenda-setter, forcing Bolsonaro to respond or to anticipate certain actions. While his speech was rhetorically great, it had imprecisions and some doubtful opinions, such as that he properly managed Petrobras.

2. The “Emergency PEC” paved the way for the new emergency aid. It fell short of its potential to improve the fiscal scenario in the short and long term. Nonetheless, the limited aid package and the fiscal restriction measures are favourable. Smaller than the previous aid package, this plan will provide support to families and businesses.

Facing an inflation increase, the Brazilian Central Bank will have to put in place monetary steps. It is a consensus that this cycle will take a more aggressive hike. Still, in a complex fiscal situation, futures interest rates could rise, affecting the price of government bonds and debt.

3. The public management dimension is in neutral mode with the much-needed departure of Eduardo Pazuello. As said here many times, Pazuello might be a good military rank, but he lacks the political and technical conditions to remain as a minister. We rather wait to see what comes next before making an assessment but is likely to be a doctor involved in the Covid-19 response.

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