Brazil & Southern Cone - December 2020

When Paulo Guedes was appointed Brazil’s ‘super minister’ of the economy in January 2019, friends and foes alike thought he would launch sweeping pro-market economic reforms. Nearly two years later, constrained by President Jair Bolsonaro and by the national congress, his superpowers appear to have waned.

Guedes’ major achievement was last year’s pension reform, but on almost all other fronts he has made limited progress. In addition, together with President Bolsonaro, Guedes is now riding a tiger of his own creation, the so-called ‘corona-voucher’ programme of emergency payments to informal workers and the poor which was implemented to help them ride out the coronavirus (Covid-19) pandemic. When it launched, the minister had been thinking of a temporary R$200 (US$40) monthly payment to eligible households, but under political pressure from congress and the country’s populist president, he agreed to a much higher R$600 amount.

The larger payment, paid from April to September, proved to be wildly successful. It reduced financial hardship, limited the economic recession, eclipsed the earlier Bolsa Família conditional cash transfer programme, and reached over 60m people.

Significantly, it boosted Bolsonaro’s approval ratings, particularly in the poor northeast of the country. With his eye on potential re-election in 2022, the president wants more from where that came from. But there is a problem. The programme has been costing as much as US$10bn a month, adding to the country’s already unsustainably large fiscal deficit and to its rapidly increasing public debt. This year’s deficit will be of the order of 12% of GDP, and the country’s debt-to-GDP ratio is expected to exceed 100%. 

• Bolsonaro’s popularity waning?

President Bolsonaro saw his popularity surge in August, partly a reflection of the success of the emergency handouts to around a third of the population. But the payments have already been cut back and are due to stop completely at the end of the year, and there are signs that this may be beginning to erode the president’s earlier popularity gains – a PoderData poll in late November showed Bolsonaro’s approval dropping to 42%, down from 48% four weeks earlier and a high of 52% in August and October.

Guedes and the wider government therefore face a potential end of year cliff edge. Fiscal rules, notably a constitutional spending cap and the so-called ‘golden rule’ – a law which establishes that total government spending cannot grow year-on-year in real terms – have been put on pause this year because of the coronavirus emergency, but they will come back into full force at the beginning of 2021.

In theory, the emergency payments could be scaled down as the economy begins to recover. Guedes has already begun that process, cutting the monthly payment to R$300 for the last three months of this year. The government remains undecided over what happens next year; Guedes had spoken of maintaining more limited cash payments as part of a new social programme known as ‘Renda Brasil’, which would have involved cutting back some existing benefits programmes deemed inefficient. But Bolsonaro quelled this plan in September, saying he would not “take away from the poor to give to the poorest”. There have since been few details given of the plan’s mooted replacement, ‘Renda Cidadã’.

Challenges lie ahead. For a start, the pandemic is not over; there are warnings that Brazil is already seeing a second wave of infections, which would generate even greater fiscal pressures. In theory Guedes could unwind complex constitutional amendments that mandate spending levels, simplify the tax system, and raise revenue through privatisations. But such moves have been resisted by both the president and congress.

Fiscal reform requires painstaking coalition-building for which Guedes shows little appetite. Guedes has constantly talked up his privatisation plans but in 22 months in office not a single state-owned company has been privatised. Some analysts attribute this to entrenched resistance from politicians; under Brazil’s clientelist political system, politicians gain leverage by controlling appointments and influencing budgets and spending by the large state-owned enterprises.

It is not clear whether Guedes has become a busted flush or is simply biding his time. After the resignation of two key advisers in August, there were rumours of his departure. This month he told the Wall Street Journal “We know we are going into the jungle for a while, but we will be back”. Critical observers say Guedes’ repeated promises of grand projects, always about to materialise “next week”, have undermined his credibility. Maílson da Nóbrega, a former finance minister (1988-1990), commented “I think the minister excessively elevates his role as someone who needs to shape expectations, this idea that he needs to send wonderful signals, to animate the market. It tends to fall into disrepute if it doesn’t materialise”.