The Week Ahead in Brazil #63

What is happening in Brazil? 

1. Politics – Justice Rosa Weber from the Federal Supreme Court (STF) decided on Monday (21) that governors of state cannot be summoned to testify at the parliamentary enquiry committee (CPI). Last week, federal deputy Osmar Terra (MDB-RS) was heard on Tuesday (22), and public health experts on Thursday (24).

The CPI heard, on Friday (25), deputy Luis Miranda (DEM-DF) and his brother Luis Ricardo Miranda, a public servant. The deputy had said on Wednesday (23) that he warned President Jair Bolsonaro (no party), in March, about evidence of corruption in the procurement process of the Indian vaccine Covaxin. The deputy’s brother worked in the process and warned him that there were problems and political pressure to speed up procedures. The revelation came after the release of a statement by Luis Ricardo Miranda on the matter to the Attorney General’s Office. Deputy Luis Miranda also mentioned that Bolsonaro would have said that the matter was related to the government leader in the House of Representatives, Ricardo Barros (PP-PR).

On Monday (21), President Bolsonaro (no party) was angry with a reporter from Rede Globo and complained about CNN’s coverage. The interview took place in Guaratinguetá, in the state of São Paulo, and the reporter had asked him about wearing a mask. The video went viral. Earlier, on arrival to visit a campaign hospital, Bolsonaro was harassed by a crowd. On Friday (25), Bolsonaro harassed another CBN journalist in Sorocaba (SP). This time, the question was about the suspected irregularities in the purchase of Covaxin.

The Federal Justice acquitted former President Luiz Inácio Lula da Silva and six other people of receiving kickbacks for issuing Provisional Measure 471/2009. Lula was accused of receiving R$6 million to extend tax incentives for automakers in the North, Northeast and Midwest regions.

An Ipec survey on the presidential elections indicates that Lula has 40 percent of voting intentions and Bolsonaro 23 percent. The survey also shows that the government’s disapproval rating increased from 58% in February to 66% in June, and its approval rating fell from 38% to 30% over the same period.

2. Economy – The Provisional Measure (MP 1.031/2021) that enables the privatisation of Eletrobras was approved in the Chamber of Deputies on Monday (21), by 258 votes in favour and 136 against.

On Friday (25), the government delivered part of the tax reform to Congress. The proposal increases the exemption range for individuals with monthly income from R$ 1,900 (£277)1 to R$ 2,500 (£364), along with other tax criteria, including taxing dividends at 20%.

Although there has been an improvement in the current fiscal situation, the Central Bank has warned that the risk remains high and that it is essential to preserve the spending cap. The Quarterly Inflation Report (RTI) brings the analysis in the midst of the pre-electoral environment, when there is a greater propensity to increase public spending. The combination of these domestic and external factors, as well as the release of the RTI, continue to contribute to the appreciation of the Real. Higher interest rates are expected and inflation for 2024 has been set at 3%.

3. Public management – On Tuesday (22), Vice President Hamilton Mourão said that the government’s big mistake in fighting the pandemic was not having carried out an effective communication campaign to guide the population.

On Tuesday (22), during the launch of the Plano Safra 2021-2022, President Bolsonaro praised the work of Ricardo Salles, Minister of Environment. Bolsonaro stated that Salles managed to connect agriculture to the environment. On Wednesday (23), however, Salles resigned. Joaquim Álvaro Pereira Leite, the current secretary of Amazon and Environmental Services at the ministry, was appointed as the new environment minister. On Friday (25), the minister of the Federal Supreme Court (STF) Cármen Lúcia ordered Salles to hand over his passport to the Federal Police.

1 £1.00 = R$6.85

How to read it?

1. The political trend has changed to negative. The approval rating have dropped slightly, the presidential coalition may have been shaken and the president is visibly irritated, instigating conflicts with the press. The CPI, as mentioned last week, has effectively started to cause wear and tear and negative impacts on the government.

Currently, it is still much more important to look at the government’s approval and rejection rates than at voting intentions. The election is still far away, but the buzz is a bad sign for the government. What really matters is the analysis that popular support for the government is decreasing, even though it occurred during the payment of the emergency aid (a smaller effect than last year) and has not yet captured the effect of the testimony of the Miranda brothers to the CPI. How much is it decreasing? Not enough to call for impeachment proceedings, nor to say that the government does not have solid support. It may come to a very bad situation, but there are no clear indications that this could occur. Why?

First, because Bolsonaro is advancing politically in the left quadrant, as if in a pre-emptive attack. Bolsonaro is increasing the exemption of personal income tax (IRPF), increasing the value of social programs, such as Bolsa Família, promising subsidised interest housing for security forces, leaving many careers out of administrative reform and taxing dividends. All this in a difficult pandemic scenario, which should bring him the support of popular segments.

Second, despite all the criticism of poor management of the pandemic, especially regarding Bolsonaro’s own behaviour in undermining basic good practice efforts (crowds, not wearing masks etc), the fact is that vaccination in Brazil is advancing rapidly. This will slow the rate of contamination and deaths, shortening the timeframe for life to return to normal, including the economic benefits. Third, he moves well on the liberal agenda: he has achieved advances in the privatization of Eletrobras, along with other reforms, and has maintained dialogue with national business groups.

Finally, the testimony of the Miranda brothers to the CPI has a strong political component. The deputy is from DEM, a right-wing political party, was a major supporter of the election of Arthur Lira (PP-AL) and was a loyal supporter of Bolsonaro. It is another sign that the government is losing support within the base parties. From the political point of view–that is, it does not matter if what he said is true or not, or whether Bolsonaro committed a crime of malfeasance, as several senators have said–the dominant narrative is that Bolsonaro must have made a mistake. To what extent this will have practical consequences and affect the presidential coalition remains to be seen. It is still strong and solid, as can be seen by the approval of the privatisation of Eletrobras. The president of the Senate, Rodrigo Pacheco (DEM-MG), may still give signs of the size of his support for the government when he decides on the operation of the CPI during the parliamentary recess.

What is certain is that some political leaders have felt that Bolsonaro may have already grown weaker: if he had a smoking gun that Miranda lied, this would have already appeared; Miranda, however, hinted that he may have proof of the conversation. Parliamentarians are worrying, over the next 12 months, about the re-elections of their political groups and this should make the political environment more volatile. It is more important to secure victories in the next legislative elections than to sustain the President. In the end, federal congress members, especially the ones from the Centrão bloc, negotiate with whoever is elected, be it Bolsonaro, Lula or any other president.

2. The economy continues on a positive trend. Monetary policy has worked, despite the persistent larger-than-expected inflation. Fiscal policy, a cause for attention and concern, from a structural perspective, is much better than anticipated by the market three months ago. Foreign investment has increased significantly, not only to take advantage of the still devalued exchange rate, but probably also as a demonstration of belief in the country over the long term. The progress in privatization of Eletrobras is a positive sign for foreign investors.

The market reaction to the taxation of dividends seems exaggerated and a way of sending a message to the government to try and get some backing off. To associate the market reaction as a resistance to this taxation, in the form of a fall in the stock market or disinvestment in the economy, as a consistent movement is completely nonsense. More like a bluff, I would say. First, because Brazil, Estonia and Latvia seem to be the only countries not taxing dividends, that is, the recipient of these dividends does not have many options in the world to be exempt from such taxation. Second, most of the future taxpayers are not global investors who could choose investment options worldwide. They are mostly regular individuals who receive dividends as part of corporate profits. Third and last point, the media has reverberated this resistance by chorusing investors and criticizing the reform. I have read few positive analyses. The fact is that changing the status quo is always more difficult. The correlation of political forces that made a certain public policy possible, the tax one in this case, remains reasonably stable, resisting these changes.

3. Public management changed to neutral. The situation between Bolsonaro and Mourão continues to hinder the resolution of important issues for the country, especially over how to prevent illegal deforestation in the Amazon region. It is not yet known what Salles’ successor will be able to do, but one thing is certain: Salles’ long departure has finally materialized, renewing some possibilities for advancing the environmental agenda that were impeded by his tenure.

There has not yet been a clear improvement in management. But the departure of Ricardo Salles and the investigations of the CPI may impose an improvement in public management as a whole. We must wait and see.

The departure of Salles and the testimony of public servant Luis Ricardo Miranda to the CPI signalled to the public service the importance of the normal functioning of institutions, within the established rules in search of the primacy of public interest over private. In a nutshell: there is no point in giving in to voluntary pressure from the minister of the day.

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