OCTOBER BRIEFING: COMING INSTABILITY?

In October, the Senate plenary finally approved the social security reform that will be enacted in November. The expected reform will now allow Economy Minister Paulo Guedes to advance his liberal economic policy agenda and dedicate more time toward shrinking the federal government bureaucracy. Among the expected reform proposals is the Fiscal Emergency constitutional amendment, a measure that would establish new policy instruments to reign in spending. Also, Minister Guedes is expected to introduce another constitutional amendment to make changes to federal government administration, including the restructuring of the civil service. Last, the government will present yet a third constitutional amendment referred to as “More Brazil”, which aims to restructure the federal government budget by reducing recurrent expenditures and providing for more discretionary spending. Congress has two distinct tax reform proposals currently under consideration. The executive has promised to introduce its own tax reform plan but has yet to take action. The government’s inability or unwillingness to articulate a well defined tax reform agenda may signal, as the social security reform indicates, that Minister Guedes is more concerned with curtailing spending than with increasing revenues to fix the budget deficit.


When will economic recovery arrive?


Brazil’s Central Bank once again lowered the prime lending rate. The so called Selic or prime rate is now pegged at 5% per year, the lowest in modern Brazilian history. Currently, the inflation rate is below the target set by the Monetary Policy Council (COPOM) and the government expects that low interest rates will fortify the country’s capital markets, lower the economy’s dependence on public finance, and provide for sustainable economic development without bouts of inflation. However, policymakers are increasingly worried over sluggish economic growth and the delayed recovery. There is growing interest in short term stimulus measures to trigger a more robust recovery, including the recent approval for a 13th month parcel (to be paid in December) for the conditional cash transfer program Bolsa Familia and the decision to allow workers to withdraw modest amounts from their unemployment trust fund accounts (FGTS). Of course, most are counting on the revitalization of the oil & gas sector to provide a greater stimulus to the flat economy. The Senate is also considering new legislation that would diminish the role of Petrobras in the offshore pre-salt oil fields to open up new opportunities for foreign investment. The government will continue to push privatizations, including Eletrobras and the Petrobras divestment program, and introduce changes to regulatory codes, especially for basic sanitation, telecommunications, and infrastructure to further encourage foreign investment.


Unemployment and Inequality


President Jair Bolsonaro and his administration are completing their first year in office amidst evident anxiety over the economic future of the country. Unemployment remains high at 12% and expectations are low regarding whether Ministro Guedes’ economic and fiscal reforms with reverse this indicator anytime soon. Also, signs that inequality is increasing are ubiquitous. Brazil’s Geography and Statistics Institute (IBGE) published a study in October that shows that the income gap between the rich and poor has never been so wide. According to the report, the richest 1% of the population now earns 33.5% more in aggregate terms than the bottom 50% of the population. This widening income gap alongside high unemployment increases the risk of social unrest, similar to that found in other South American nations with neoliberal economic policy orientations. It is worth noting that the recent protest surges in Chile and Ecuador as well as the electoral victory of the center-leftist Kirchernist-Peronist coalition in Argentina are due to deepening poverty and inequality stemming from market friendly policies implemented in recent years.


Which coalition governs the country?


The recent passage of the social security reform and the real possibility of congressional approval of additional constitutional ammendments to restructure economic and fiscal policy does not necessarily suggest that the Bolsonaro government enjoys a broad political coalition. Rather, the congressional preference for liberal economic reforms demonstrates the strength of the Chamber of Deputies President Rodrigo Maia (DEM) and Senate President Davi Alcolumbre, both of the Democratas party (DEM). They lead a center-right congressional coalition that favors a liberal economic agenda but does not support President Bolsonaro unconditionally. The same congressional coalition that passed social security reform is resistant to embracing the president and his more disruptive behavior, and withdrew support for the nomination of the president’s son, federal deputy Eduardo Bolsonaro, as ambassador to the U.S.


The President’s Social Liberal Party Implodes


The Bolsonaro family clashed with sectors of their Social Liberal Party (PSL) and its president, Luciano Bivar. The conflict has to do with access and control of the PSL’s share of the Party Fund, a public resource aimed at funding the electoral campaigns of political parties and their candidates. The feud is likely to intensify as Brazil inches toward the 2020 municipal elections and the 2022 presidential election. As a result, the PSL leader in the Chamber of Deputies, Delegado Waldir of Goiás, was removed by the Bolsonaro loyalists who installed the president’s son, Eduardo Bolsonaro, as leader of the 53 member PSL federal deputy delegation. Federal Deputy Joice Hasselmann (PSL), the president’s hand picked congressional spokesperson, was also sacked and replaced by Eduardo Gomes of the Brazilian Democratic Movement (MDB). Hasselmann was closely associated with President Bolsonaro until very recently when she started distancing herself from the Bolsonaro clan in order to increase her viability as a candidate for mayor of the city of São Paulo. President Bolsonaro has given indications that he plans to create a new political party, but it is unlikely that such an initiative could rival his PSL, the second largest party in the National Congress.


While this party leadership dispute was taking place, a Special Congressional Inquiry (CPI) on “fake news” was launched to investigate the systemic dissemination of misinformation during last year’s electoral campaign. The division of PSL between Bolsonaro loyalists and Bivar loyalists makes the government’s efforts to advance its ambitious reforms even more problematic as the CPI investigates the PSL and its electoral campaigns in 2018.


Bolsonaro and the Military: Risk of an Authoritarian Setback?


During a recent interview, Federal Deputy Eduardo Bolsonaro (PSL) suggested that the government may need to implement a draconian authoritarian measure, inspired by Institutional Act #5 implemented under military rule in 1968, to authorize a rapid escalation in political repression, if the Brazilian left were to “radicalize.” Congressional leadership reaction was shift and highly critical of Eduardo’s statement. However, Minister of Government Security, General Augusto Heleno, took the issue seriously by suggesting that the government would need to study how to implement such a measure.

These statements by Eduardo Bolsonaro and General Heleno come in the context of the Supreme Court’s ruling over the constitutionality of imprisonment before the plaintiff has exhausted all his rights to appeal criminal conviction. On 7 November the Supreme Court ruled that such imprisonment was unconstitutional, paving the way for the release of former president and Workers Party (PT) leader Luiz Inacio Lula da Silva from the Federal Police jail in Curitiba the following day. In 2018, then commander of the Armed Forces, General Eduardo Villas Bôas, remarked that if Lula were released from prison there would be a “social convulsion.” It appears that such military leaders, including Heleno and Villas Bôas, have contemplated authoritarian responses to the possibility of Lula’s release and the hypothetical mass mobilizations that would result from his opposition to the Bolsonaro government.


It is too soon to understand the ramifications of Lula’s release from prison. He has been convicted on two separate cases of corruption, both pending appeals. Lula is still disqualified from running for office because of these convictions, unless they are annulled by an appellate court or the Supreme Court. It is likely that these appeals will drag on until 2022, allowing Lula to travel the country, make daily statements on the government’s performance, and rally the Brazilian left to achieve greater unity and resolve to push back on the country’s lurch toward liberal economic policymaking and social conservatism under Bolsonaro.

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