Guedes missed his unique chance in Brazil, says foreign fund manager

Economy Minister Paulo Guedes missed a rare opportunity to increase the flow of foreign capital into Brazil and to carry out more privatization, as well as to invest in reducing social inequality. That’s the assessment of Carlos von Hardenberg, co-founder of Mobius Capital Partners, an investment fund specializing in emerging markets.

He disagrees with the fund’s owner, Mark Mobius, for whom social benefits need to be cut. In an interview with SheetHardenberg says the next president needs to focus on reducing inequality, as well as advancing reforms and privatization.

For the economist, who says he closely follows the Brazilian elections, Bolsonaro has a more pro-market agenda, but Lula no longer scares the private sector. In the end, the two candidates are not so radically different, he says.

Are you following the Brazilian elections closely? We have been waiting for these elections for a long time. We have just returned from Brazil, where we spent ten days meeting with banks, small and large companies, industry and economists.

This time, the candidates are not the most popular in the world, both have divided society and deepen those divisions with their rhetoric. It is very interesting to see that the private sector and the youth population we spoke to do not consider the two candidates [Lula e Bolsonaro] wonderful, but they have confidence in Brazil’s institutions, in the system of checks and balances, in the largely independent judiciary with a willingness to investigate scandals, and in the fact that, in the end, the two candidates are not so radically different, when look at the facts.

How do you rate the top candidates? It is clear that Bolsonaro is more pro-market, he wants to deepen reforms and privatizations, which is very important. But Lula also no longer represents a deviation from market practices, there is no fear in the private sector, and that is good news. The biggest risk would be a deviation from more prudent macroeconomic policies, with measures such as price controls, trade controls, any type of taxation that penalizes and hinders entrepreneurs from doing their business. Plus more corruption scandals. All this would be a disaster.

The good news is that Brazil has already had its share of the global crisis, and the country has strengthened. This is evidenced for example by the fact that the Central Bank of Brazil was very quick to predict and attack inflationary pressure, 18 months ago, when the interest rate was 2%, and it increased to much more real conditions. This gives confidence to the currency and to foreign investors.

What is the level of foreign interest in Brazil today? Brazil is incredibly attractive on many fronts. It is blessed with one of the most prepared and well-educated workforces, there is a lot of talent, there is a good education system, which generates an army of entrepreneurs who are constantly investing in the country. The big question is what will Brazil do with all this and how will it deal with the social dilemma, how to make society more egalitarian, distributing more wealth among the underprivileged. It’s the main challenge.

And what does the next president need to do? The bad news is that it is not an easy path and requires difficult decisions, with a lot of discipline. It is necessary to deepen privatizations, to make a government transparent and increasingly efficient, innovative, with lower and more effective tax collection. There is also a need for a socially oriented system that guarantees access to education for the underprivileged. We still need to invest more in public-private partnerships.

It should not be forgotten that all countries are competing against each other. Brazil competes with South Korea, Taiwan, China, the United States. It is necessary to create a good environment for foreign investors to attract a sophisticated industry. Why is the semiconductor industry not investing more in Brazil, which has water, energy and access to some of the most vibrant economies in the world? In technology, Brazil has not yet attracted foreign investors as it should.

And who is the best candidate for this, in your opinion? the two candidates [Lula e Bolsonaro] have the ability to do so. Of course, to me, the language Bolsonaro uses and many of the policies he advocates are highly questionable. But he has an ear for the private sector. Just like Lulu. And we learned from the last time that Lula was in power, when there was a lot of fear, given his past, but at the end of the day he was very attentive to the private sector. The two candidates can do a lot, but Bolsonaro is clearly the one most on the side of entrepreneurs right now.

There was great expectation at the beginning of the government among the market, especially due to the presence of the Minister of Economy, Paulo Guedes, and a portion was frustrated. I was also frustrated. I would describe it as a huge missed opportunity to do more.

Do what else? He should have been a lot more aggressive at both ends. It should have created more incentives for foreign industries to establish themselves in Brazil, which is not that difficult, you just need to have a clear agenda and push accordingly, giving access to land, financial incentives and support for foreign companies. It should also have done more in terms of privatization. He tried, of course it was a very difficult period for any government, but he could have done so much more.

Finally, it should have done more to support the disadvantaged. There were all these programs [auxílio emergencial], which were expensive and in part there were abuses. But Brazil needs more of that.

Do you fear riots in the elections? Violent protests are much more related to the economy, the level of unemployment, state aid or the lack of perspective on the future than to the political agenda strictly. In Brazil, there is good news and bad news, but overall the economy is doing reasonably well. The country benefits from the rise in commodities, this helps with unemployment and stability. But also the interest rate, at the level at which it is, harms household income and hinders the poorest from doing business and getting bank loans. There is some risk, but I would personally bet that deep civil turmoil is not at play right now.

Do you see a risk of a blow? Hope not. I do not think so.

One of President Bolsonaro’s calluses is the environmental agenda. In times of ESG [sigla em inglês para boas práticas nas áreas ambiental, social e de governança]how will foreign investors feel safe to invest in Brazil? This is a tragedy and unfortunately one of the biggest problems for everyone who does business with Brazil, this ignorance, the language it [Bolsonaro] uses to talk about the environment.

Brazil depends a lot on its ability to attract foreign capital, and this is positive, because it leads many companies to focus on the environmental part. Even some of the most polluting companies in Brazil have embarked on initiatives to reduce the consumption of resources in recent years, they have come to respect the environment much more than before.

Bolsonaro and his ilk seem to enjoy attacking environmentalists. The good thing is that Brazil has a very diverse Parliament that works well, with different voices. Even if Bolsonaro wins the election, he should not be able to continue down this path. There are checks and balances.

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Carlos von Hardenberg

Portfolio manager and co-founder of Mobius Capital Partners, focused on emerging markets. Previously, he worked for 17 years at Franklin Templeton Investments.