Latin America Advisor

A Daily Publication of The Dialogue

Will Brazilians Back Bolsonaro’s Plans to Privatize?

Financial markets so far have reacted positively to the presidency of Brazil’s Jair Bolsonaro. // File Photo: Brazilian Government. Financial markets so far have reacted positively to the presidency of Brazil’s Jair Bolsonaro. // File Photo: Brazilian Government.

Stocks in Brazil’s Bovespa index hit record highs in the first days of the year amid investor optimism about the new government of President Jair Bolsonaro. In his inaugural address, Bolsonaro pledged to “carry out important structural reforms,” and within days of taking office, he announced plans to privatize 12 airports and four seaports. Will Bolsonaro’s privatization plan achieve the results he anticipates? What roadblocks could his privatization agenda encounter? Which industries are poised to prosper under his plan, and which will lag behind? What other initiatives should Bolsonaro undertake to spur economic growth?

Shelly Shetty, member of the Advisor board and head of Latin American sovereign ratings at Fitch Ratings: “Structural reforms are required to boost Brazil’s modest potential growth. This is especially important given risks emanating from the external headwinds confronting Brazil. Tightening external financing conditions for emerging markets, commodity price volatility, China’s slowdown and a protracted and slower recovery in Argentina are the major external risks Brazil could face in 2019. Brazil’s 10-year average growth rate of just over 1 percent is very low and has been a factor contributing to the worsening fiscal dynamics. Improving the business climate, liberalizing the economy, increasing trade openness, reducing state participation through rationalization of bureaucracy, privatizations and greater infrastructure investment will all be necessary for Brazilian potential growth to improve. Some of these elements form part of Bolsonaro’s agenda. However, the speed and scope of pushing through microeconomic reforms to boost investment and growth is uncertain. Privatizing parts of the transportation sector can have positive spillovers, although the timeline for implementation is unclear. Moreover, a more aggressive privatization effort can face political and social resistance. Besides the microeconomic reform agenda, making progress on fiscal reforms to strengthen the medium-term outlook for public finances will be critical for sustaining the recent improvement in market confidence. The social security reform is paramount for containing spending growth and making the ‘spending cap’ (a new institutional anchor for Brazil’s fiscal policy) credible and viable over time. While the new administration is signaling its willingness to implement a pension reform, congressional resistance can still undermine the prospects of a meaningful reform given its unpopular nature.”

Gary Clyde Hufbauer, nonresident senior fellow at the Peterson Institute for International Economics: “President Bolsonaro’s plan to privatize 12 airports and four seaports will likely trigger strikes by unionized government workers. Without drastic labor reforms, the airports and seaports will not be worth much to private investors. But the looming contest brings to memory President Reagan’s celebrated confrontation with PATCO, the air-traffic controllers union, in 1981. Reagan prevailed, and that victory set a commanding tone for his White House years. Whether Bolsonaro is equally successful remains to be seen. If not, he will find it difficult to carry through with pension and entitlement reforms—a more difficult but even more essential undertaking that is sure to spark widespread resistance, not least among his military supporters. At this juncture, the Bovespa banquet seems premature.”

Samar Maziad, vice president and senior analyst in the sovereign risk group of Moody’s Investors Service: “Jair Bolsonaro’s election as Brazil’s president has improved investor sentiment because of expectations of market-friendly policies, including the resumption of fiscal reform. However, a fragmented Congress still poses a risk. Although the economic policy direction of the new administration is taking shape with a focus on pension reform and privatization, policy coordination within the government and relations with Congress are untested, posing risks for policy implementation. The new administration will likely face challenges in passing constitutional amendments and will need to work to build coalitions to approve reforms. In addition, contradicting views within the administration will likely lead to mixed messages regarding policy direction. If this persists, it could eventually lead to market volatility if reforms are delayed. Additionally, Bolsonaro could challenge the way Brazilian institutions function, creating political noise in the process. Ultimately, the policies themselves and the president’s ability to push through fiscal and structural reforms that support growth will determine Brazil’s credit prospects. The central bank will likely maintain a relatively accommodative monetary policy stance in the context of still-weak growth. Corporate profits will gradually recover in 2019 as high unemployment at around 12 percent and a large output gap reflecting excess capacity in different sectors continue to weigh on private consumption and investment. A continued period of low interest rates should support economic activity. Structural reforms and sustained economic recovery would benefit nonfinancial corporations, such as airlines, steelmakers, homebuilders and building materials producers, that depend on discretionary consumer spending or investments. Diminished government influence over state-owned enterprises would support operating and financial performance for state oil company Petrobras.”

Aaron Melaas, senior associate at McLarty Associates: “There is broad scope for privatization in Brazil, given the costs of maintaining state-owned enterprises. The 400 such enterprises at the federal and state levels received $3.9 billion in federal funds in 2017. In addition to cutting costs, the Bolsonaro administration claims that its plan to privatize major parts of the transportation infrastructure will generate nearly $1.9 billion in investment—while privatization of additional state-owned enterprises in the energy sector could draw billions more. The privatization drive is led by influential policymakers, including Economy Minister Paulo Guedes and Petrobras CEO Roberto Castello Branco. However, other interests remain resistant to moving forward quickly. Several cabinet members with military backgrounds are particularly cautious about privatizing state enterprises in strategic sectors. These include Government Secretary Carlos Alberto dos Santos Cruz, who is responsible for the Investment Partnership Program (PPI), and Energy Minister Bento Costa Lima Leite. The Supreme Court also ruled last year that sales of major Petrobras assets require congressional approval, so the Bolsonaro administration will have to negotiate with legislators who are concerned about a repeat of last year’s trucker strike if Petrobras allows diesel prices to rise as well as potential job losses if Eletrobras is privatized. A recent Datafolha poll showed 60 percent of respondents were opposed to privatization, so management of the process will face intense scrutiny to ensure transparency and limit corruption. Developing an effective privatization agenda will require the Economy Ministry to expand its focus, developing regulatory proposals to promote competition and ensure private investment creates social benefits without compromising public services.”

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