Brazilian President Jair Bolsonaro. Picture: REUTERS/ADRIANO MACHADO
Brazilian President Jair Bolsonaro. Picture: REUTERS/ADRIANO MACHADO

Brazil needs to flatten the curve. No, not that curve. Latin America’s most afflicted country (160,000 dead and the health minister hospitalised for Covid-19) is bracing for a second wave of infection without ever having vanquished the first. Now, however, another more familiar scourge is cresting: inflation.

After a punishing first semester, with industrial output crashing by a record 27% from February to April, a recovery is stirring. A third quarter rally brought Brazilian manufacturing nearly to pre-pandemic levels, well ahead of its battered neighbours. A surprising 313,564 formal sector jobs were created in September (albeit amid record unemployment). That’s the good news.

Not so good is the demand that all this pent-up dynamism has stoked: prices are rising well above the levels that the government planned for and the markets predicted. (Inflation is running at about 3.0%. Yet to gauge by the policy dissonance in Brasilia, the odds are long for the sustained rebound the region’s signature economy badly needs.

Blame the overeager central bank, which has kept the benchmark Selic borrowing rate at a dovish 2% even as the domestic market stirs. Throw in the country’s fiscal dithering — to breach or not to breach the government spending cap? — and public debt approaching 100% of GDP, and investors understandably have retreated. The result is that yields on Brazilian debt are soaring — as investors demand a steeper return for iffier bonds — when they should be flattening.

Navigating the pandemic slump is a global challenge, of course. Complicating matters in Brazil is the official dubiety, as fiscal prudes and profligates compete for control of the policy agenda and President Jair Bolsonaro simultaneously cheers on both camps.

Perhaps that’s no surprise. A longtime congressional bottom feeder, Bolsonaro navigated to office on the bilge water of public resentment by promising law and order, probity and parsimony but has since discovered the magic of public largesse, crony politics and policy chaos.

Hence Bolsonaro’s contortions to perpetuate the emergency pandemic cash that Brasilia has delivered to more than 67-million Brazilians, even as he pays lip service to those who warn that making that perk permanent will bust the budget and violate the constitutional spending cap.

In 2019, he bet on confrontation, clashing openly with legacy political parties, academics and the media; he even marched his cabinet to the doors of a purportedly recalcitrant Supreme Court, to the delight of his right-wing ideologues.

The result was institutional whiplash: the legislature overturned a record 24 presidential vetoes through August. The high court rejected executive decrees nearly as fast as he announced them. The federal police he tried to kibitz in October arrested Bolsonaro’s deputy senate leader with purloined public cash in his underpants. Even the military men he’d recruited to lend an authoritative sheen to his cabinet have pushed back, albeit often after having been bullied into line or forced to resign.

The institutional pushback has led not so much to an aggiornamento of “Bolsonarismo,” as some have dubbed his farrago of conceits, as an existential cold boot. Facing a sheaf of impeachment motions for mishandling the pandemic and other debacles, Bolsonaro turned down the choleric rhetoric, pushed aside the noisy right-wingers and sought out the congressional base he’d long disdained. The pivot secured him enough seats to block an impeachment drive (which takes two-thirds of congress), but did nothing to advance a coherent government agenda or eliminate the ambient noise over spending.

“Bolsonaro has secured a critical mass of support to survive, but his government is reaching an inflection point,” says political analyst Octavio Amorim Neto of the Getulio Vargas Foundation. “Brazil has yet to achieve fiscal credibility, but Bolsonaro’s window to act is closing. If nothing is done we could be in for an enormous crisis next year.”

Bolsonaro still has the opportunity to avoid economic disarray, but only through tough choices. To comply with the spending cap, which creditors are watching closely as a measure of solvency, “Bolsonaro will have to propose deep cuts in mandatory expenditures,” writes Adriana Dupita, who analyses Brazil for Bloomberg Economics. Administrative reform could help, she said, though not likely the diluted and widely pilloried version the government finally sent to congress in October.  

Alternatively, Brasilia might also scythe back social spending — and run the risk of blowback from the millions of low-income families who rely on Covid-19 cash. One brazen workaround said to be in the works would be for Bolsonaro to parlay an eventual second wave of contagion into a renewed “state of calamity” in January, so exempting the government from the legal budget limits, according to the insider political newsletter Tag Report. Whatever the plan, the market would swiftly punish any solution that entails “manoeuvring around the fiscal rules,” Dupita says. “There is no in-between scenario.”

Don’t hold your breath for the upcoming municipal elections, where more than 500,000 candidates from 30 parties will compete for clout in the headline political alignments as Brazil strives for recovery. “Clarity and predictability are everything Brazil needs and the last thing the country’s hyper-fragmented party system can deliver,” said Amorim.

New electoral laws, encouragingly, will eventually force underperforming parties to dissolve or consolidate, but the shakeout could take several more cacophonous years. Investors would be forgiven for hitting mute.



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