UPDATE ON 2020: I have reviewed this post. You may check the critique at
https://adler.net.br/en/bolsonaros-first-year-i-was-wrong-about-china-but-right-about-the-banking-industry/
The election of Jair
Bolsonaro as the next Brazilian president is very probable.
In this post, I will
describe his base of support and the official documents of his campaign and
present some conclusions on how his government will affect foreign investors.
The initial two thirds
of the post will review the scenario and the candidate’s proposals. My personal
views and forecast follow in the end.
1. SCENARIO
I.
THE MEN BEHIND BOLSONARO’s PLAN FOR THE ECONOMY
Before ultimately
choosing Paulo Guedes as his ministry for economic affairs (he is in the right of the picture) Bolsonaro had a political affair with Mr. Adolfo Sachsida.
Sachsida is a PHD in
economics, with a post-doc degree from the University of Alabama. He has kept a
blog and a YouTube channel for many years, which he used to defend that Brazil
desperately needed more economic freedom. He may be called a classic liberal, in
the sense of an advocate for small government and free enterprise (close to a
libertarian, definitely not a liberal as in “left-wing”).
Ultimately, Bolsonaro
chose Mr. Paulo Guedes, who is also an economist with clear free market
inclination. He has a PHD from the University of Chicago and is the founder of
a think tank dedicated to free enterprise, called Instituto Millenium, through
which he has published many articles criticizing Brazilian excessive
bureaucracy, taxes and government intrusion.
Moreover, Mr. Paulo
Guedes is a well-know player in the market. He has founded Ibmec, a very
successful college that teaches business and economics. He has also worked in
the financial market and is one of the founders of Banco Pactual bank.
In short, Bolsonaro has
been building relationships with advisors who are unquestionably pro-business.
II.
BUSINESS GROUPS BACKING BOLSONARO
Undeniably, Bolsonaro
enjoys a very high popular approval. This is his real strength. The industries mentioned
here should not be understood as hidden puppeteers running the show, but only
as lateral supporters.
a)
Agriculture
Agribusiness has been
an early adopter of Bolsonaro. This has much to do with the previous
government’s support for land expropriations, invasion of land by guerrilla
movements and severe environmental restrictions.
b)
Banks
Banks and other
financial institutions were, to some extent, comfortable under the worker’s
party (PT). The economy had good periods and credit expansion was incentivized.
Moreover, the government’s increase in expenses relied heavily on internal
loans. Business was good.
In the last 04 years, the
severe economic recession damaged the relationship between PT and banks.
Geraldo Alckmin, the
candidate from PSDB party, was supposed to be the candidate of the financial
sector. His party is basically favorable to increase in government expenses,
although not so radically anti-business as PT.
However, Alckmin’s
performance in the pools (and eventually in the actual first round of voting)
was dismal. As a result, the financial industry ended up favoring Bolsonaro,
who is not n favor of increasing government indebtedness, but who at least offers
a pro-business agenda.
c)
Industrial sector
Support from
organizations representing the industrial sector has never been enthusiastic. Nevertheless,
Bolsonaro was the only candidate to firmly promise to uphold and perfect the
labor laws reforms approved recently. So, they joined him.
III.
OTHER SOURCES OF SUPPORT
Some of the non-business
entities that support the candidate are the state’s Police Forces, some sector
of the Military, most Protestant churches and a relatively small part of the
Catholic Church. There have been hints of support from the Freemasonry.
2. ANALYSIS OF THE OFFICIAL PROGRAM
I.
OPENING
The campaign program
opens with a bold statement in favor of private property.
People must be free to
make choices. The material fruits of those choices, if generated honestly in a
free-enterprise economy, have a name: PRIVATE PROPERTY. (…) your car, you land
are fruit of your work (…). They are sacred and can’t be stolen, invaded or
expropriated.
(the expression “private property” is in all caps in the document)
The program indicates
that the rules providing for equal treatment of foreigners and Brazilians will
be maintained.
Any person in the
national territory, even if he is not a Brazilian citizen, has inalienable
rights as a human being, and has the duty to obey the laws of Brazil.
II.
MAIN ECONOMIC PROBLEMS DIAGNOSED IN THE PROGRAM
The main issues that
the new administration wishes to address are:
a)
Insufficient and deteriorated
infrastructure;
b)
Health and education nearing collapse;
c)
High unemployment, as official statistics count 13 million people
without work;
d)
Explosive deficit in Federal budget.
This last topic receives
considerable attention. The primary deficit (before payment of interests) is
described as 139 billion BRL (37,5 billion USD). The team promises to reduce it
rapidly, by reducing expenses, mainly by removing political appointees from the
Federal structure.
The nominal deficit
(which includes expenses with the payment of interests), amounting to 489,3
billion BRL (132,2 billion USD), is described as a great reason for concern.
The deficit in the public pension system (around 77 billion USD each year) is
also included in the list of problems.
III.
STRUCTURAL PROPOSALS
a) Privatization programs
Aggressive
privatization of state-owned companies.
b) Further relaxation of labor
laws
c) Changes in the forecast
of expenses in the yearly budget
The
government will adopt zero-based budgeting, as an effort to trim as much
unnecessary expenses as possible.
d) Blending and reduction
of ministries
The
minister of economic affairs will probably absorb several other ministries,
such as the Treasure, Planning, Industry, etc.
IV.
SPECIFIC PROPOSALS
a) Reduction of import
tariffs and trade agreements
There is a proposal to
reduce import taxes, eliminate non-tariff barriers and to enter into new
bilateral trade agreements.
The program mentions
incentives to the importation of high-tech machines to enhance the adoption of
“industry 4.0” and the success rate of startups and scale-ups.
b) Reduction of daily
bureaucracy and tightening of compliance
The project proposed by
the campaign team is twofold.
One promise is to
reduce daily bureaucracy, the infamous need for stamps and certified copies
that is so common in Brazil. There is a promise to unify the procedures for
incorporation and liquidation of companies.
Another ramification of
this topic is the promise to crack down on corruption and tax evasion.
c) Tax reforms
The projects for this
area are:
·
Progressive reduction
of overall tax burden;
·
Consolidation of
federal taxes in one, or very few;
·
Reduction of Federal
tax income and increase in the municipality tax income;
Note:
Concentration of tax revenue at the Federal level is a huge problem in Brazil,
since it leaves municipalities and states in a very disadvantageous position
when negotiating with the Federal government. This may require constitutional reform.
·
Institution of a
general system of negative income tax, to replace the limited system of Federal
assistance
Note: A system of this
kind would reduce the leverage of the Worker’s Party, since direct handling of
monetary benefits is a big campaigning point for PT.
d) Social security reform
For social security,
the project is to create a parallel system of individual contribution and to
reduce the mandatory withholding of social security tax in the paychecks. The
plan is to progressively reduce the current system, which is dependent on complementary
funding from taxes, and to shift as many people as possible to the new
individual contribution system.
e) Agribusiness
Bolsonaro’s Project for
the area include the blending of the ministries for agriculture and environment
protection. Ministries that are connected to agribusiness, such as fishing will
also be agglutinated and subject to centralized policies.
f) Energy
Overall, reduction and
simplification of regulation. The program brings heavy criticism of former
president Dilma’s policy of mandatory review of rules for the electricity
sector.
There is mention of
putting an end to the rules demanding minimum percentage of local content for
Petrobras’ purchases.
Also, the program
mentions a reform in the rules for distribution of natural gas.
g)
Infrastructure
Great
emphasis on the need for renovation of railroads, ports and airports. The cabinet will try to attract private
investment for these areas.
3. MY PERSONAL OPINION AND
FORECAST
Bolsonaro’s assessment
of the Brazilian situation is very accurate. And the solutions are on point. I
believe that, in economic terms, his government will be very successful.
I.
my forecast for LEGAL AND ECONOMIC
DEVELOPMENTS
a) Restrictions to the purchase
of rural land by Chinese investors
Since
the Lula presidency, Brazilian law has been tweaked to make it harder for
foreigners to purchase rural land. Many lawyers have studied the issue and
concluded that the limitations were unconstitutional. But the fact is that
severe restrictions are already in place.
Bolsonaro agrees with such restrictions and has openly criticized the purchase of large areas by foreign investors, especially
Chinese (but also Arabs and others).
His
administration will probably apply measures to make it harder for foreign
investors to purchase property titles. Those measures could mean anything from harder
administrative control over deeds to an actual constitutional reform.
The
practical impact of these restrictions for daily business should be low. The
market has already adapted to the current restrictions, by shifting from land
purchase to contracts for sale of future crops, joint-ventures and similar
arrangements.
b) Reduction of red tape
in environmental licensing for mining and agricultural projects
Bolsonaro has promised
to ease environmental restrictions. But, more than waiving legal requirements,
which would require legal changes subject to congress, his administration will
probably restructure the environmental law enforcement agencies and the
procedures for acquiring licenses.
Environmental licensing
is partially managed by states and partially managed by the Federal Government.
The productive sector has accused the agencies involved in the process of being
slow, ideologically biases and, at times, corrupt.
It is an absolute certainty
that they are slow. Licensing takes years.
I must note that
similar programs to reduce bureaucracy have been adopted by the Temer
government in several specific areas, such as in the customs, with very good
and fast results.
c)
Mercosul will lose prestige
Bilateral agreements will be favoured.
d)
More demanding tax and legal compliance
One can anticipate stricter
tax penalties and enforcement of anti-corruption controls.
e)
Petrobras will not be privatized, yet
Bolsonaro’s
cabinet should include several military advisors, who will act as a counter-balance
to Mr. Guedes’ libertarian views. Companies that are deemed essential to
national security, such as the nuclear energy companies and Petrobras, will
probably remain under Federal control.
f)
Legalization of ownership of guns for personal use
This
is a huge campaigning point. Brazil allows the ownership of guns, in theory,
but administrative and importation restrictions make them available only to the
upper middle-class or to people with connections.
The
stocks of Forjas Taurus, the main arms manufacturer in Brazil, have increased in
value significantly during 2018, in anticipation of a surge in sales.
g)
Purchase of military and defense equipment
The
military and the state police forces will receive special attention. The arms
industry, including not only pistols and offensive equipment, but also intelligence
technology and vehicles, should keep an eye in Brazil.
h)
Banks and the financial market
My
clients who work in the financial market are very excited and expect an increase
in foreign investment, mergers & acquisitions and in the general economic activity.
II.
ADDRESSING CRITICS
As
I’m writing this article, about 10 days from the 2nd round of the
election, there are many manifestos, declarations and articles, mostly from
left-wing thinkers, that condemn Bolsonaro’s economic plans, or that suggest
that, despite his plans, his government will turn to dictatorship and eventually
ruin Brazilian institutions and international credibility.
There
are too many of them. But names such as Piketty and media outlets such as The
Economist will give the reader an idea of what I’m talking about.
Plainly
speaking, I deem this kind of criticism utter nonsense. I have read all the
material I could find and perceived that there has been very little analysis of
Bolsonaro’s actual plans.
Most
criticism is based on ideology or is, simply put, propaganda. There is no
analysis of his actual cabinet members, political base or economic policies.
The
people who studied the plan and that have skin in the game, such as financial
firms, stock brokers and Brazilian banks, approved the proposals and do react positively
each time a pool shows that the chances of the candidate are increasing.
