Brazil will be celebrating presidential elections in October 2022 in a complex economic situation with rising inflation, monetary tightening and with its currency, the real, trading at record lows.
The government’s denialist stance on the COVID-19 pandemic has hit the economy and increased poverty levels in the country. To boost his chance for re-election, Bolsonaro plans to implement a social programme, known as Auxilio Brasil, to replace the Bolsa Família cash welfare programme implemented by former president and likely election rival Luiz Inácio Lula da Silva.
Bolsonaro’s new programme will increase monthly welfare payments by USD 71 and, to unblock these funds, he is trying to pass a law through the Congress by 9 December to raise the government spending limits. If approved by both the Congress and the Senate, the bill would grant the government an additional USD 16.7 billion of spending power.
An analyst at a Brazilian asset management company wasn’t impressed, “The spending cap was a constitutional amendment implemented in 2016 and it was widely welcomed by financial markets as a tool to make the country’s debt more predictable. The government’s decision to scrap the spending cap shows how Bolsonaro’s administration has lost the fiscal discipline he promised during his electoral campaign.”
“The government’s decision to scrap the spending cap shows how Bolsonaro’s administration has lost the fiscal discipline he promised during his electoral campaign.“
Analyst, asset manager, Brazil
“The question is not if the government has abandoned its liberal economic agenda but if it ever seriously pursued it,” commented a Brazilian policy analyst, “the government’s economic decisions have been conditioned by the outbreak of the pandemic, but the resignation of senior officials of the Ministry of Economy [Salim Mattar, director for privatisations, and Pablo Uebel, digital government director] in August 2020 was a clear sign that things were not moving in the right direction promised by Paulo Guedes [Minister of Economy]. The same happened last month, when the treasury and budget secretaries [respectively Bruno Funchal and Jefferson Bittencourt] resigned after the government decided to breach the federal spending limit.”
“The question is not if the government has abandoned its liberal economic agenda but if it ever seriously pursued it.”
Policy analyst, think tank, Brazil
The reform of the country’s fiscal rules alerted investors who originally expected Bolsonaro to reform the state pension system, and thus improve the country’s credit rating. Itaú Unibanco, Brazil’s largest private bank, recently forecasted a drop in GDP of 0.5% for 2022. Paulo Guedes, Minister of the Economy, accused the bank of political activism and said that the economy would grow over 2.1% as Brazil had already entered a V-shaped recovery with investments from the private sector expected to be around USD 100 billion.
Predictably, the analyst went straight down the middle with his prediction, “Itaú’s forecasts are worrying but I still believe that Brazil has the capacity to grow by 1% in 2022. I don’t think that the economy will fall into recession as certain economic sectors like agribusiness, mining and energy remain quite separated from the government’s political earthquakes.”
Meanwhile, inflation has devaluated the real by 32% since 2014 and interest rates are expected to climb to 11.25% as the central bank explores options to keep inflation under control. Not an easy environment!