Brazil`s Economy after the Election: Hope and Awakening

The German Chamber of Commerce in São Paulo considers the new Brazilian government as the key to economic “hope and awakening”. This article describes what economic changes are needed in Brazil, how Bolsonaro is planning to implement them and how German companies feel about it.

On October 28th, the right-wing populist Jair Bolsonaro became Brazil`s new president in the second round of voting. Bolsonaro, also called the “Trump of Brazil”, has been heavily criticized for his ideological views both internationally and domestically. However, the economy is expecting his presidency to create the long-wanted economic reboot of Brazil – at least “as long as words are followed by deeds” (Klaus Hepp, CEO of Vulkan do Brasil).

 

Government of Experts

Hepp considers it a first positive signal that Bolsonaro who himself claimed in an interview to have “no clue about economics” is planning to staff the most important ministries with experts. Moreover, the existing 29 ministries will be reduced to 17 or 18. Also, the number of “persons of trust” in the ministries will be reduced by 30%. This downsizing will be achieved by creating super-ministries, e.g. the ministry of finance headed by investment banker Paulo Guedes and the ministry of justice headed by Lava-Jato judge Sérgio Moro. Other important institutions such as Petrobras, the Central Bank and the Brazilian Development Bank BNDS will also be headed by technical experts hoping to correct the mismanagement of the currently ruling labor party PT.

 

Challenges of the new Government

In spite of the economy`s trust in Bolsonaro, his government will ultimately be judged on its delivery. The most challenging aspects in Brazil are the consolidation of the national budget (currently, the public debt is almost 80%) , particulary the reduction of personnel costs (currently, five federal states spend more than 70% of their total budget on staff) as well as the debt reduction of federal states, cities and municipalities.

Moreover, the long overdue pension and labor reforms need to be developed and implemented.

In order to revive the economy and stimulate investments, infrastructural concessions for airports, ports, rail networks and highways need to be sold. Furthermore, Bolsonaro`s government will push for privatizations of the currently 418 state-owned companies. With view to the equally badly needed tax reform, the GTAI São Paulo does not expect any major changes but rather incremental ones.

To what extend these plans can be realized -given the high party fragmentation in Congress, reform-adverse Parliamentarians as well as influential lobbies (such as the evangelicals and agricultural interest groups) – remains to be seen.

 

Foreign Trade

Another reason for the GTAI`s optimism is the neo-liberal mindset of Bolsonaro who favors market liberalization and privatizations. While his is planning to focus more on the trade relations with the USA and Europe, deepened cooperation can also be expected with view to its Latin American neighbors, particularly Argentina and Chile. At the same time, declared Anti-Communist Bolsonaro is warning against trade ties to China and has attempted to exclude Venezuela from Mercosur based on its missing democratic structures.

The new government is expected to close negotiations over the new free trade agreement between the EU and Mercosur as well as awaiting a decision on the OECD membership which Brazil applied to in May 2017.

 

Challenges of German Companies in Brazil

According to Vulkan-CEO Hepp, German and foreign companies is Brazil suffer from the lack of international competitiveness which he attributes to the “custo Brasil”. The “custo Brasil” subsumes all country-specific burdens that limit the profitability and export capabilities of a company. This includes general issues such as the low educational level, a bad public health system, a lacking infrastructure and high energy costs as well as high taxes. While the industry only equals 12% of the taxed branches it generates 22% of the tax revenue which is deemed disproportionate by the respective tax payers.

Moreover, specific hurdles such as high material costs based on high import taxes and bureaucracy costs as well as high interest rates limit the competitiveness of Brazilian-based companies. Additionally, lower efficiency and a reduced quality of goods and services is impeding profitability.

Hepp subsumes that in order to be successful in Brazil one needs to be „extremely attentive and flexible“. With view to the new government he emphasized the wish for planning security. How entrepreneurs can make themselves heard and where they can push their interests with the new government remains to be seen.

 

*The article is based on the GTAI-Webinar „Kurswechsel in Brasilien – Was erwartet deutsche Unternehmen unter der neuen Regierung?“ from November 28th, 2018.