Brazil Opens Its Doors

With pension reform approved, Congress is shifting its focus to creating a more pro-business environment.

The question of pensions has divided Brazil for years, with business and investment interests seeking benefit-trimming reforms. The country’s prior president, Michel Temer, faced massive protests against reform, but the new president, Jair Bolsonaro, rallied his supporters and in August, Brazil’s lower house—the Chamber of Deputies—passed a pension overhaul bill; the bill is before the Senate at press time. Other reforms, including measures affecting the tax system and public administration, and an ambitious privatization program, are also on the docket. New free trade agreements are expected down the road.

Brazil is still dealing with its past. GDP growth this year is not expected to pass 0.9%, according to the central bank. Inflation is low, which allowed the Central Bank of Brazil to cut the basic interest rate to a record low of 5.5% in mid-September, after a prior cut in July, following in the footsteps of the larger Western economies. Analysts are betting on the rate being trimmed again; some expect a new historic low in the 4% to 4.5% range by the end of 2019. For 2020, the International Monetary Fund expects that GDP will expand 2%.

“We should not consider 2019 a lost year,” says Carlos Kawall, chief economist at Banco Safra and former treasury secretary. “The growth rate is frustrating, of course, but the deceleration is not broad enough to involve all the productive sectors.” The Brazilian real’s value is moving in line with other emerging-market currencies, he notes, not artificially supported. “The growth rate is structurally low because of the international atmosphere and because it is not expected to improve through high consumption, as it has done in the past,” he adds. “There is cautious optimism for 2020 and real optimism for the long term.”

One barrier to higher growth is the banking system, which has not yet cut its stratospheric interest rates for loans and financing for individuals and small and midsize companies. Brazil chalked up a high unemployment rate of 11.8%, or 12.6 million workers, in August; 41.1% of the population work outside the formal labor market, and 65.1% of Brazilians are indebted.

For most of the unemployed or underemployed people, opening a small business is the only way to survive; but the vast majority are waiting for better financing conditions to step forward. Congress approved creation of a positive credit registry—similar to a consumer credit rating but for businesses—as a first step in dealing with this difficult situation. Still, the central bank is expected to do more in terms of regulations to encourage commerce, supported by further initiatives from state banks and the Brazilian Development Bank.

PRIVATIZATIONS LOOM

Brazil should command the attention of large foreign and sovereign investors, thanks to the investor-friendly agenda of Economy Minister Paulo Guedes. Under his aegis, the ministry has already released a list of 17 state companies to be sold by the end of 2023. Among them are Eletrobras, the dominant electricity utility; and ECT, the mail, logistics and goods-delivery company. In October, the government conducted an auction of rights to oil exploration and production adjacent to desirable pre-salt areas, attracting at least 11 foreign companies that bid more than $2 billion. Pre-salt blocks are scheduled for larger auctions in early November, expected to add another $25 billion to public coffers. More than 105 state-owned assets were privatized by the end of 2018, according to the Inter-American Development Bank, with more tagged for the auction block, including railways, seaports and airports.

An auction of 5G mobile services has been postponed until the second half of 2020—and the government has warned it will not allow another rescheduling. A new bill allowing private investment in sanitation services and infrastructure is in the discussion stage in Congress. “I predict that next year we will bidding [out] from 7,000 to 8,000 kilometers of roads; in 2021, more than 8,000 kilometers; and perhaps we will have some more for 2022,” Infrastructure Minister Tarcisio de Freitas said at a transportation conference last fall.

The timing is positive for privatization, says Sérgio Vale, chief economist at consultant MB Associados, “because now there is legal certainty for investors and the liquidity stock in the world is high, with less attractive bond markets in the US and Europe; but Brazil needs more political stability.” He adds, “The results expected would be better if President Bolsonaro were more prudent in his speeches.”

On the trade front, Guedes and his team have already achieved some of their goals. By the end of the current administration, they hope to start implementing the free trade agreements between Mercosur and the EU, and the European Free Trade Association, which were successfully concluded in the middle of this year. Meanwhile, the South American bloc is negotiating new deals with Singapore, South Korea and Canada; pursuing negotiations with Japan and the US; and working internally to lower its common external tariffs.

Over last 10 months, the Ministry of the Economy has taken advantage of Mercosur rules to slash tariffs on more than 2,300 machines and equipment items in an effort to upgrade the industrial sector. “We are engaged with a trade-liberalization agenda to introduce Brazilian productive sectors into global value chains, to start technological partnerships, to improve our exports” says Marcos Troyjo, deputy minister for Foreign Trade and International Affairs. “And to change the business atmosphere in the country.”

The Bolsonaro Effect

Brazilian trade is vulnerable to President Bolsonaro’s unpredictable ideological swings. The far-right leader has already summoned up a list of troubles through provocative speeches and off-the-cuff decisions. His scheduled trips abroad, between the end of October and early November, aim to heal wounds from earlier inflammatory nationalistic statements about China and the outrage ignited in Saudi Arabia, Qatar and the United Arab Emirates (which buy a lot of Brazilian chicken) by his decision to move the Brazilian embassy in Israel to Jerusalem. All three countries are rich sources of investment in Brazil, as Bolsonaro quickly learned.

The most critical presidential initiatives thus far have related to the Amazon forest fires, which have roiled the global business community. Instead of reviewing his old positions on the economic development of the Brazilian Amazon—particularly indigenous areas—Bolsonaro loudly defended mining, including illegal wildcat gold miners, and large-scale agriculture activities in the region. He also accused nongovernmental organizations of starting the fires, inspired Germany and Norway to withhold funding for sustainability projects in the region and publicly fought with French President Emmanuel Macron on the issue.

“The government made mistakes when it dealt with the environmental issue, which is so delicate,” says Kawall. “It might put at risk the Brazilian agribusiness sector, which does not depend on the lands of the Amazon.”

“Most concerning is the impact of Bolsonaro’s statement on the Mercosur-EU free-trade agreement, which requires ratification by European legislatures,” says Vale. Austria’s Parliament has already voted no. “There is no justification for the president going public to say that deforestation is allowed,” Vale adds.

Minister of Agriculture Tereza Cristina Dias was the first to try to control the damage done by the president’s declarations. Brazilian agribusiness-export companies have also launched goodwill campaigns abroad to retain their markets.

In particular, they are working with Dias to restore Brazil’s relationship with China—and to convince the president that some of his positions are against the national interest. Despite the deceleration of economic growth in China, it remains Brazil’s biggest trading partner; and some observers expect the exchange of goods, services and technologies between the two countries to recover. In the long term, Brazil will keep its position as a supplier of food and protein, iron ore and mineral commodities, and oil to China, expects Marcos Caramuru, a business consultant and former ambassador to the People’s Republic of China.

“Between 2010 and 2020, the size of the Chinese economy will double. If it happened here, Brazil would be a Germany,” says Troyjo. “China is nowadays more dependent on its domestic consumption, and its numbers are gigantic. The Brazilian business sector can be tranquil on this matter.”

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