In October 2018, Jair Bolsonaro, a far-right candidate for the PSL party, won Brazil's highly-polarised presidential election. Since becoming president in January 2019, he has made significant changes to economic, security and trade policies. A2 Global analyses his government's policies and what they mean for firms with interests in the country.
On 1 January 2019, Jair Bolsonaro was sworn in as Brazil's president at a ceremony in the capital Bras'lia. A former army captain who served as a congressman for right-leaning political parties between 1991 and 2019, Bolsonaro was elected president in October 2018 in the most polarised election since Brazil's return to democracy in 1985. A hardline conservative with pejorative views on women, sexuality and racial minorities, Bolsonaro's candidacy led to a counter-movement termed #EleN'o, or 'not him', and widespread street demonstrations in cities throughout Brazil. Ultimately, however, Bolsonaro defeated Fernando Haddad from the centre-left Workers' Party (P.T.), achieving 55.1 per cent of the vote to Haddad's 44.9 per cent.
Throughout the electoral process, central themes of Bolsonaro's candidacy were the elimination of corruption, the need to restore the rule of law and public security, and a desire to kick-start the country's sluggish economy, which is still emerging from the 2014-17 recession ' the worst in Brazilian history. Bolsonaro has constructed his multiparty government and now has until at least 2022 to implement his agenda. Three key issues which impact almost all businesses with operations in Brazil are the macroeconomic climate, the security environment, and the country's trade policy. How these will change under Bolsonaro is therefore crucially important, and are analysed below.
Although previously a supporter of state intervention and protectionism, Bolsonaro's core economic beliefs have moved significantly to the right since Paulo Guedes ' a free-market economist and co-founder of the BTG Pactual investment bank ' became his main economic advisor and nominee for finance minister in November 2017. During the election campaign, Bolsonaro called for a liberalisation of Brazil's economy, particularly through pension reform, lower taxes, and the privatisation of state assets. As president, Bolsonaro hopes to stimulate the private sector and reduce public sector debt, which stood at 76.7 per cent of GDP in January 2019, the second highest debt-to-GDP ratio in Latin America. Bolsonaro's approach also seeks to boost growth following the recent recession (see graph below), from which Brazil is still recovering.
The most challenging economic reform facing Bolsonaro's administration is a restructuring of the country's pensions system. Brazil's generous pension regime ' which allows workers to retire at 55 on 70 per cent of their final salary for the rest of their lives ' accounts for a third of the country's public spending. With people living longer and large numbers of people reaching the minimum retirement age, the system has contributed to large budget deficits, in turn concerning investors about the country's public finances. While politicians have sought to reform the increasingly expensive pension system for over a decade, neither former P.T. presidents Luiz In'cio 'Lula' da Silva (2003-2010) and Dilma Rousseff (2011-2016), nor the centrist Brazilian Democratic Movement's (PMDB) Michel Temer (2016-2018) were able to re-design the system.
Bolsonaro has suggested tackling pension reform in a gradual manner since becoming president, and on 20 February he presented his reform bill to congress. The proposal includes a rise in the minimum retirement age for men and women ' to 65 and 62 respectively ' and adjustments to payment dates. This approach is likely to garner significant support in Congress for two reasons: Bolsonaro's political capital ' both among legislators and the general public ' is high, and legislators are more likely to back a gradual reform which has a relatively limited impact on their constituents' interests, compared to an overhaul of the system. While any reform of the pension system will involve unpopular choices, and is likely to lead to street protests and strike action by groups which oppose the proposal, Bolsonaro has a stronger mandate for reform than his three predecessors.
Beyond pension reform, the incoming government will seek to stimulate the private sector through a liberalisation of the economy. A central aspect of this will include tax reductions ' Bolsonaro's economics team have reportedly proposed reducing corporation tax from 34 per cent to 20 per cent, as well as lowering the top rate of income tax. The administration also plans to simplify the tax system. Currently, companies in Brazil spend approximately 1,958 hours per year to file their taxes according to the World Bank's 'Doing Business 2018' report, some 12 times more than the average for the OECD group of wealthy market economies.
Bolsonaro will also seek to advance the privatisation of a number of state-owned assets to increase vital government revenue. On 8 January 2019, his government proposed selling or closing down approximately 100 state-owned firms, including in the banking and energy sectors. Despite this, Bolsonaro has stated that he does not intend to privatise key publicly-owned banks Banco do Brasil and Caixa Econ'mica Federal. The government will also propose the sale of some state energy assets, particularly those belonging to Petrobras, the state-owned petroleum company, and Eletrobras, a state-owned electricity utilities firm. On 11 January 2019, a ruling by the Supreme Court's chief justice restored a presidential decree regulating Petrobras' asset sales, reducing the risk of judicial branch decisions impeding the government's privatisation agenda. In strategic areas of energy policy ' particularly power generation ' Bolsonaro is unlikely to privatise state assets, a reflection of his cabinet's military contingent and their overriding concern for national security issues, including domestic energy security.
A key reason for Bolsonaro's election victory was declining public security and waning rule of law. In 2017, Brazil recorded 63,880 homicides, a 3.7 per cent increase on the previous year. The national homicide rate of 30 murders per 100,000 people exceeds that of most Latin American countries, including Colombia and Mexico, while Brazil has 17 of the world's 50 most violent cities. Within Brazil, there is significant variation between regions and states. The south-eastern industrial state of S'o Paulo, Brazil's most populous, has the country's lowest homicide rate of 10.7 per 100,000 people. In the north-eastern state of Rio Grande do Norte, however, the rate is 68 per 100,000. The proliferation of homicides and violent crime is closely related to the expansion of the lucrative drugs trade and competition between the gangs which control it. Shrinking police budgets since the 2014 recession have also contributed to the reduced capacity of law enforcement agencies.
In seeking to reduce violent crime and improve the rule of law, Bolsonaro's administration has already liberalised gun ownership laws. On 15 January 2019, Bolsonaro signed a 120-day decree which makes it easier for over-25s without a criminal a record to buy firearms and keep them at home. The decree, which applies to those living in the countryside and in urban areas where the homicide rate is above 10 deaths per 100,000 people, also removes the police's 'discretionary' role in approving civilians' requests to purchase firearms. It does not, however, allow the public the right to carry guns, which is currently limited to police, public and private security officers, and the military. Legislators are also debating reducing the minimum age requirement for gun ownership from 25 to 21. While this policy delivers a key campaign pledge of Bolsonaro's, expanded gun ownership is unlikely to improve security. The new president has also urged congress to provide legal support for police and suggested that security forces who kill criminals could receive immunity, which could exacerbate the use of firearms.
A key indicator of the influence of Brazil's armed forces in the new administration is the number of former military officers in Bolsonaro's cabinet. As of February 2019, seven former military officers hold cabinet portfolios, including in key roles such as defence minister, and mines and energy minister. This is in addition to Bolsonaro himself and his vice-president Hamilton Mour'o, a former general. The cabinet's large military contingent is likely to prompt Bolsonaro to prioritise issues of national security and political and budgetary backing for the country's armed forces.
While Brazil has traditionally been a closed economy with an active participation of the state and extensive tariff and non-tariff barriers, Bolsonaro has pledged to open up the economy to global market forces. At a speech at the World Economic Forum in Davos, Switzerland in January 2019, Bolsonaro said that the 'new Brazil' would be more open to foreign investment and would facilitate commerce through the promotion of business-friendly policies. While Bolsonaro, like U.S. President Donald Trump, has been a vocal critic of multilateral trade agreements, as president he will seek to modify existing deals rather than cancel them. Despite his criticism of South America's Mercosur trading bloc, which Bolsonaro views as overly politicised and placing limitations on Brazil's trade policy, he pledged to 'perfect' the agreement when Argentine President Mauricio Macri visited Bras'lia shortly after Bolsonaro's inauguration. Brazil is likely to push for a renegotiation of the agreement to allow members to conclude bilateral trade deals.
In addition to renegotiating existing trade agreements, Bolsonaro's trade policy is likely to centre on concluding negotiations on outstanding bilateral agreements, such as the E.U.-Mercosur pact. While an agreement has seemed close on several occasions in recent years, a deal has yet to be reached due to disagreements on the extent of access for Brazil and Argentina's agricultural products to the E.U. market. A further obstacle to the deal is opposition from European politicians, particularly within the European Parliament, many of whom oppose Bolsonaro's views and are likely to seek to prevent a deal during his mandate. In seeking to reduce China's influence in Brazil's economy, a key campaign pledge of Bolsonaro's, the government will also look to strengthen bilateral trade ties with the U.S.; however, a number of issues currently preclude an agreement, including U.S. agricultural subsidies and tariffs on Brazil's aluminium and steel exporters. Despite Bolsonaro's intention to open the economy to international competition, significant progress is likely to be difficult due to an increasingly protectionist international environment, while the demands of constituents in areas such as manufacturing and services are likely to limit legislators' support, which is needed to liberalise these important sectors.
In seeking to liberalise Brazil's sluggish economy, the government of Jair Bolsonaro will provide significant investment opportunities for private firms looking to enter the Brazilian market. Bolsonaro's most important economic task, however, will be reforming the country's expensive pension system, something his three immediate predecessors were unable to achieve. In turn, this heightens the risk of highly disruptive protests and industrial action. In security policy, Bolsonaro's liberal approach to gun ownership is likely to heighten security risks, particularly in Brazil's deprived northern and north-eastern regions, while opponents and civil society groups are likely to stage frequent rallies in major urban areas against Bolsonaro's views, statements and policies, increasing travel risks. In trade policy, the government will seek to reform the Mercosur deal to grant Brazil greater scope to agree bilateral pacts.