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Brazil's next economic superminister Paulo Guedes and President-elect Jair Bolsonaro. (Photos: Bozano Investimentos, Bolsonaro.com.br)
Wednesday, October 31, 2018
Trade Talk

Brazil: Optimism Tied to Guedes Success


Investors hope Brazil’s next economic super minister will succeed.

BY LATINVEX STAFF

As investor sentiment has dramatically fallen in Mexico (see Mexico Airport: Default, Investor Confidence Loss), local and foreign investors are cautiously optimistic about Brazil after the October 29 election of Jair Bolsonaro, who will assume the country’s presidency on January 1.

He has announced the appointment of Paulo Guedes to head a planned super ministry combining the current planning, finance and industry ministries, Reuters reported.

Guedes is widely respected among investors due to his pro-business plans for Brazil, Latin America’s largest economy.He is one of the co-founders of Banco Pactual (now BTG Pactual), a partner at Bozano Investimentos and holds a PhD in economics from the  University of Chicago, where he was taught by the late Nobel laurate and free-market guru Milton Friedman.

However, there are still some concerns about how much influence Guedes will ultimately have against nationalist aides of Bolsonaro, while any market-oriented reforms will have to pass a badly-fractured Congress.

“Although Jair Bolsonaro’s election as Brazil’s next president will likely improve investor sentiment and reduce exchange-rate volatility, a fragmented congress still poses a risk to reform,” Moody’s warns. "The details of the new administration’s economic policy are yet to become clear as fiscal spending, pension reform and political support in congress will be challenges for 2019 and beyond."

Deep structural challenges that are contributing to weak growth, large fiscal deficits and rising general government debt will severely constrain the new government's policy flexibility, Fitch Ratings says.

“The strong electoral showing for Bolsonaro and his party could boost the new government's political capital and enable the building of a working legislative majority should centrist parties provide support,” Fitch says. “How effectively the new administration is able to use the honeymoon period to prioritize and pass its economic agenda remains uncertain.”

The ability of the president-elect to form an effective coalition to pass key economic bills early in the term will be an important early gauge for the overall commitment and direction of economic policy and the extent of reforms likely to be passed under his administration, it says.

“The cohesiveness of the economic team will also be important, including economic cabinet appointments and any changes at the central bank,” Fitch says.

Guedes favors keeping Ilan Goldfajn on as central bank chief he told reporters October 30. That is a move that would be welcomed by investors. Goldfajn has won widespread praise for his handling of anti-inflationary monetary policies in a clear improvement from the previous government of President Dilma Rousseff and also a contrast to neighboring Argentina, where the government appears unable to reduce double-digit inflation.

Bolsonaro ran on a broadly business friendly agenda including formal independence of the central bank, privatizations, reduction in tax exemptions, tax simplification, pension reform, compliance with the spending cap, and faster fiscal consolidation,” Fitch says.

However, the exact details of how his administration plans to achieve these objectives are limited, it says.

“Structural reforms to improve the business climate, liberalize the economy and develop infrastructure will likely be necessary to increase Brazil's potential growth rate,” Fitch says. “At the same time, reforming social security, which accounts for over 40 percent of primary spending, as well as taking other measures to control spending will likely be key for deficit consolidation.”

A weak reform implementation could undermine investor confidence, increase the sovereign's borrowing costs and adversely affect the medium term growth outlook, it warns.

Guedes favors passing unpopular pension reform before Bolsonaro takes over – a move that would help the new president’s political capital during his honeymoon period.

However, Congress Speaker Rodrigo Maia said on Tuesday that conditions to approve pension reform are still far off, Reuters reports.
 


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