Publish in Perspectives - Wednesday, March 4, 2020
Structural reforms, such as the telecommunications modernization bill, are important for developing Brazil, the author argues. The bill will let companies own cellphone towers and other assets. (Photo: Geraldo Magela/Agência Senado)
After several landmark reforms, Brazil needs to reinvent itself.
BY WALTER T. MOLANO
Brazil has been one of the best performing sovereign credits of the past year. President Jair Bolsonaro has spearheaded several landmark reforms that have pushed the Brazilian economy in a new direction and helped restore investor confidence.
As a result, he was able to reverse many of the setbacks due to 13 years of leftist rule. Although President Luiz Inacio Lula da Silva, started off on a good foot, respecting the independence of the central bank and not implementing many of the radical policies he once advocated, he, along with his successor President Dilma Rousseff, failed to advance with much needed reforms. As a result, the economy eventually stagnated.
President Bolsonaro reversed direction and embarked on an ambitious reformist agenda. A year of deregulation, privatization and reforms has yielded positive results. In 2019, the central government posted the smallest fiscal deficit in 5 years. More than a million jobs were created in the past year, and the unemployment rate is declining. A new anti-crime package has seen the crime rate fall 22 percent in the past year. The president, who is a former army captain, campaigned on a “tough on crime” platform. The sweeping package not only addresses street crime, by streamlining sentencing procedures, it also tackles corruption and organized crime, thus giving prosecutors more ammunition to go after incidents, such as Lava Jato. Not surprisingly, the package was spearheaded by Sergio Moro, the current Minister of Justice and the former judge who presided over many of the cases that were involved in the infamous corruption scandal. Such advances have gone a long way to improve investor and consumer confidence. The proliferation of new consumer credit products has also helped improve consumption. As a result, the government expects the Brazilian economy to grow 2.5 percent in 2020.
Inflation is one of the country’s big success stories. In January the IPCA posted a monthly inflation rate of 0.21 percent. This was the lowest monthly inflation rate since the start of the Real Plan in July 1994. The annual inflation rate in the first month of the year was 4.19 percent, versus 4.31 percent, the month before. The announcement beat most projections, and it was instrumental in allowing the central bank interest rate committee (COPOM) to reduce the benchmark SELIC rate to 4.25 percent. Brazil used to have the highest real rates in the region. This honor has now passed to Mexico, and it has allowed the Brazilian Real (BRL) to steadily devalue. Some analysts see the devaluation as a lack of confidence in the Brazilian economy, but they fail to see that it is the direct result of the interest rate dynamics. In reality, analysts should welcome the weakening currency to help counter the deterioration on the external front. In January, Brazil posted a trade deficit. This was the first time in five years that the country posted a trade deficit in January. Although President Bolsonaro has made great strides in improving the economy, Brazil still faces major structural problems that will not be easy to fix.
China’s admission into the World Trade Organization (WTO), almost two decades ago, brought new life to the Brazilian economy. A major commodity producer, the country had languished for the second part of the 20th century, due to protectionist measures in the developed world. The U.S., Europe and Japan went to great lengths to protect their farmers through the use of tariffs and farm subsidies. Unable to provide more added-value to their commodities, due to these measures, it also lacked the capital and labor force needed to move into more advanced sectors. During the 1970’s, the country took on billions of dollars in foreign loans to create its own telecommunications, computer and military industries. Unfortunately, for the most part, most of these forays ended in disaster. Embraer and Petrobras were two of the few exceptions.
However, China’s burst of economic activity, which started in 2001, provided a much needed respite for Brazil. The problem is that China is quickly becoming a developed country. It is no longer growing at the double-digit growth rates of more than a decade ago. On the contrary, it will eventually have a steady-state growth rate similar to Japan’s, due to the demographic legacy of the one-child rule. As a result, its demand for commodities will no longer grow at such exponential rates, as in the past.
This means that Brazil will need to reinvent itself. That is why structural reforms, such as the telecommunications modernization bill, are so important. Brazil must continue to improve its infrastructure and education level in order to better mobilize its factors of production and find new ways to remain relevant on the international scene.
Fortunately, it is moving in the right direction.
Walter Molano is head of research at BCP Securities and the author of In the Land of Silver: 200 Years of Argentine Political-Economic Development.