Brazil’s economic hopes on Bolsonaro’s shoulders

Global investors seem thrilled at the prospect of Jair Bolsonaro taking over the Brazilian presidency on 1 January, says Sandra Rosa in Finanz und Wirtschaft. The benchmark Ibovespa index has gained a fifth since his election victory began to look likely in the autumn. The hope is that the new leader will continue the business-friendly structural reforms of his predecessor Michel Temer. But the optimism looks wildly overdone.

Brazil has been in “an economic funk for the better part of a decade,” says Bloomberg. The economy’s state has been a result of “heavy-handed government meddling in private industry, a sprawling pay-for-play corruption scandal, and political gridlock that allowed the budget deficit to balloon”. To get state spending and debt, now worth around 80% of GDP, under control the government would have to pass some radical reforms.

A crucial move would be to address an overgenerous and unjust public pension system that is key to the country’s debt problem. Temer failed to get enough votes to push through pension reforms. Bolsonaro would need 60% of votes in Congress to implement them. “Turkeys, however, tend not to vote for Christmas,” says Amundi’s Yerlan Syzdykov in the Financial Times. The cuts would be unpopular, so this is “a mission impossible.” Meanwhile, Bolsonaro’s cabinet has already started “backtracking” on selling off state companies.

Bolsonaro may also be tempted by a Trump-style stimulus to boost growth, but with the annual overspend already at 7% of GDP, there is no fiscal room for manoeuvre. And let’s not forget, says Rosa, that the military, which is far from business-friendly, is likely to play a large role in Bolsonaro’s government. Brazil’s stockmarket rally is on borrowed time.

Source: MoneyWeek