Bolsonaro is often compared to Donald Trump and some of the clumsy moves of his government since taking power on the 1st of January were reminiscent of the chaotic White House administration. There were various bungled policy announcements that had to be withdrawn while some of his inner circle have already garnered negative headlines. However, his trip to Davos was widely seen as his first big test. He put in a mixed performance at the forum, with several questions remaining unanswered.
Yet investors remain optimistic as the administration has shown early signs that it will deliver the fiscal reforms that the market expects. One of the main reasons for the market’s love affair with Bolsonaro, who himself has an erratic ideological history that has ranged from left-wing populism to pro-market policies, was his appointment of Paulo Guedes as financial ‘super minister’. As a co-founder of Brazilian bank, and holding a PhD in economics from Chicago University, investors expect Guedes to reform Brazil’s bloated public sector.
So far investors have plenty to be pleased about. Guedes is beefing up the pension reform already in Congress by cutting the transition period to 12 years from 21, which should deliver BRL275bn ($74bn) in additional savings. One of the big question marks about Bolsonaro’s ability to deliver reform is his lack of majority in Congress, this now looks like less of a worry, says Mario Marconini, Managing Director of political consultancy, Teneo. “The evolving government coalition can already count on a “hard-core” of 255 out of 513 representatives in the lower chamber. A jump towards the necessary 308 threshold for reforms is viewed as highly feasible given the overall ideological orientation of the House.” Admittedly the situation in the Senate is more sensitive, says Marconini. “There, the opposition reaches 20 out of 81, thus requiring only an additional 13 to bar constitutional amendments.” Nonetheless Bolsonaro’s ability to pass legislation seems a lot stronger than it did straight after his election victory.
Trade not tariffs
And while the fiscal reform may be the main topic for investors, there is positive economic news on other fronts. During the campaign Bolsonaro promised to cut Brazil’s high import tariffs and since coming to power he’s following up on that. His first foreign visitor was Argentine President Mauricio Macri and both men made it clear that they are keen to reform the Mercosur trade bloc.
“there is positive economic news on other fronts…”
At present Brazil’s import tariffs average 14% notes Quinn Markwith, Latin America Economist at Capital Economics, compared to an emerging market of 6%. The high duties are a major factor in the country’s poor productivity as they add to the notorious Costo Brasil. If Bolsonaro manages to cut tariffs “history suggests that this might plausibly add as much as 0.75%-pts to potential GDP growth”, says Markwith.