Will Bolsonaro take Brazil in a new direction?

There is a reason why he is often referred to as 'the Trump of the Tropics'. “We are going to change the destiny of Brazil,” Jair Bolsonaro pledged after securing the country's presidency in October.

Just like his US peer, Mr Bolsonaro has made provocative, often divisive statements, typical of his populist approach to winning the hearts and minds of Brazilians.

So far, this strategy has paid off. Not only did Mr Bolsonaro win the presidency, he seems to have convinced the business community, who hope he will turn the page on the country’s turbulent recent past, which saw Brasilia fall into a vicious circle of corruption scandals and economic disaster. 

Brazil bounces back

Just a few weeks into the Bolsonaro presidency (having assumed office on January 1), the São Paulo stock exchange index has been one of the world’s best performing indices of 2019 so far, the Brazilian real is staging a comeback in the currency market, and FDI seems to be flowing back into the country. 

However, critics claim Mr Bolsonaro’s populism will backfire should he struggle to deliver on his ambitious agenda and keep his cabinet on-message. He must, they say, make good on his promises to change Brazil in the long term by rooting out corruption, reforming the welfare state and reigniting economic growth.

Mr Bolsonaro has named Sérgio Moro as his justice minister, the popular judge who cracked down on those involved in the so-called lava jato (car wash) corruption scandal that involved former president Luiz Inácio Lula da Silva, and appointed Chicago School of Economics student Paulo Guedes as minister of the economy. The latter has drafted a liberal agenda aimed at reforming state finances and opening up the national economy. 

“Investors are feeling positive and quite hopeful that this administration can turn around an economy that has been underperforming for basically five years,” says Alberto Ramos, the head of Latin American economics at Goldman Sachs. “[The government has] an agenda that inspires the market with a combination of liberalisation, an increase in the efficiency of state-owned enterprises and public spending, tax reforms and a number of other things but it needs to deliver tangible progress.”

A growth story

The Brazilian economy is gradually rising from the ashes of its most recent recession, which saw GDP shrink by 3.5% in both 2015 and 2016. A recovery in commodity prices, combined with the hopes attached to the new administration, restored annual growth to 1.4% in 2018. The IMF predicts GDP growth of 2.4% and 2.2% in 2019 and 2020, respectively.

The government says it is committed to making the most of the recovery and its own high approval ratings by restructuring the country's pension system (which Mr Guedes has described as his number one priority), tackling a growing fiscal deficit problem, pushing through a set of market-friendly reforms and privatising Brazil’s 147 state-owned enterprises to unlock private investment. In addition, the new government has backed the unfolding divestment programme of state oil company Petrobras, aimed at raising $26.9bn through 2023 by selling assets and concessions, thereby reducing the company’s level of indebtedness.

Goldman Sachs projects that FDI in Brazil will make up 4.2% and 4.5% of GDP in 2019 and 2020, respectively, up from 3.3% in 2016. “There is already solid evidence of new FDI in the pipeline,” says Mr Ramos. “In the previous years, FDI was contained by political uncertainties with major occurrences such as the impeachment of Dilma Rousseff and the presidential race playing on the minds of investors. Now we are looking at a four-year horizon with stronger discipline and investment-friendly policies, although we are still wondering whether this will be truly transformational or just minor improvements.”

Risks loom

The road ahead for Mr Bolsonaro and Mr Guedes could be bumpy. The president’s Social Liberal Party does not have a majority in parliament, and the government will have to deal with as many as 30 different parties to build consensus around his proposed reforms, something that will soon test the deal-making skills of its members. It remains to be seen whether Mr Bolsonaro himself will be willing to tone down his outspokenness and delegate powers to cabinet members.

“He’s riding on the back of the economic recovery, but there are a lot of unknowns, and a few risks to the current positive outlook,” says Jimena Blanco, head of Americas at risk consultant Verisk Maplecroft. “One risk is whether he [continues to take] the advice of the technocrats in his cabinet, or, riding on a popularity wave, decides he knows best.”

Mr Bolsonaro frequently leaned towards protectionism and economic nationalism in his years as a congressman and during the presidential campaign. He has become a champion of the status quo of the Brazilian conservative business and industrial elite, as well as other centres of power such as the police and armed forces (he himself was an army captain). His cabinet appointments, most notably that of Mr Guedes, signal an initial endorsement for a more open and liberal economy, but questions remain because deep liberal reforms may hurt the vested interest of Mr Bolsonaro’s power base. 

Mr Bolsonaro and Mr Guedes have already appeared out of sync on a few occasions, particularly when the former announced a tax increase on common banking transactions, then abandoned it, and spoke in favour of just a “minor” pension reform, reportedly upsetting Mr Guedes on both occasions. Mr Bolsonaro’s remarks against trade and investment with China have also been toned down.

Jungle exploration

The president’s already unfolding social and environmental deregulation programme is another area of concern for companies in sectors such as agriculture and mining, particularly when it comes to his plan to scale down the existing protection surrounding the Amazon’s ecosystem by widening the scope of the agriculture ministry, which is traditionally affiliated with the agribusiness lobby.

“If they start deregulating agriculture production to allow deforestation in the Amazon jungle, then companies sourcing in Brazil start facing problems of traceability and compliance in international supply chain best practice,” says Ms Blanco.

“In mining, most companies are not going in and exploring in areas that were previously protected because they understand the social and environmental risks, and the attached risks for their own reputation and brand internationally. However, there is a concern that if other local companies start doing it, then the mining industry as a whole faces greater community opposition because of deregulation in certain parts of the country,” he adds.

Mr Bolsonaro’s ambitions will soon be tested as the new legislature takes its first steps. The overall success of his tenure will eventually hinge on his capacity to fine-tune his relationship with Congress and his own cabinet. In the meantime, investors may be wise to prepare themselves for moves that come straight from the Trump playbook, as Mr Bolsonaro’s populism takes over Brasilia and national politics.