Bolsonaro leaves economic deterioration as inheritance for next president

Whoever assumes the presidency of Brazil in 2023, whether the current president is re-elected or not, will have to deal with a legacy that includes a worsening of the internal business environment, the country’s international image and the main indicators of the economy.

Considering current projections for the end of 2022, virtually all major macroeconomic indicators will be at worse levels than they were at the end of the Michel Temer administration (2016-2018).

It will be a scenario of higher interest rates, inflation, unemployment and indebtedness. Weaker activity level, foreign investments and exchange rate. There will be a slight improvement in public deficit indicators, but with results far from the campaign promise to put the bills in the blue.

To stay in two highly relevant indicators, the dollar should go from BRL 3.87 at the end of 2018 to BRL 5.50 next year, one of the biggest devaluations among emerging countries in the period. Unemployment would rise from 11.6% to 12.2%, historically high levels.

The expectation that a liberal-biased economic team would promote a series of reforms to control and improve public spending has been dashed. Mainly after the government’s recent decision, with majority support in the Chamber so far, to break the spending ceiling created in 2016 to enable electoral expenses that go beyond a more robust social program.

Since then, interest rates have soared, the exchange rate has depreciated and many economists have started talking about the possibility of recession next year.

The executive director of the IFI (Independent Fiscal Institution), Felipe Salto, compares the revision of the ceiling to what happened during the Dilma Rousseff government (2011-Aug.2016). At the time, a series of practices that became known as “creative accounting” ended the fiscal rule that sought to generate surpluses to reduce debt.

“We are watching, strictly from this fiscal aspect, a repeated film”, says Salto. “At that time, there was a clear guideline that it would be an expansionist policy. Now, it was a government that claimed to be fiscally responsible, that valued the ceiling, but it is doing the opposite. The inheritance will be the worst possible.”

In its last report, the IFI calculated that it would be possible to expand the social program without breaking the ceiling, given that half of the gap that will be created by the approval of the PEC dos Precatório will be intended to cover other expenses.

For Salto, the main challenge for those taking over in 2023 will be to resume economic growth, something that has as a precondition the reestablishment of confidence in the balance of public accounts and an improvement in spending to make more public investments viable.

Marcelo Neri, director of FGV Social, cites as a challenge for the next government an increase in poverty that may be generated by uncertainty about the new social program Auxílio Brasil. The measure announced by the government guarantees the payment of R$ 400 only until the end of the 2022 election year.

According to him, the end of the emergency aid created in the pandemic and the return to Bolsa Família at current values ​​would automatically put about 7 million Brazilians in poverty, considering a monthly income of R$ 260 per capita.

There will be 34 million people, a level well above the 23 million at the end of 2019, before the pandemic (an increase from 11% to 16% of the population). “For 2023, you have a poverty increase ordered today,” says Neri.

Insper professor Fernando Ribeiro Leite cites the control of inflation expectations, another factor that mainly affects the poorest population, as another challenge for the future government, alongside the recovery of fiscal policy credibility.

For Leite, President Bolsonaro and Minister Paulo Guedes (Economy) will deliver an economy worse than that found in early 2019, a deterioration that cannot be attributed solely to the impacts of the pandemic.

The Insper professor assesses that the problem in Brazil, unlike what occurs in countries like Argentina, is more a signal than a drastic correction of all economic fundamentals.

For him, the election of a president who does not create so much political and institutional instability and who has an economic team that knows how to deal with the public machinery can already lead to an immediate improvement in financial conditions.

“The main legacy that the Bolsonaro government will leave for the next government is the challenge of recovering economic growth, guided by sound fiscal and monetary policies, and not by occasional populism. It is, fundamentally, not to do what it does. [Bolsonaro] did,” he says.

Antônio Corrêa de Lacerda, professor at PUC-SP and president of the Federal Council of Economics, says that the next president will inherit a situation of stagflation, with around a third of the economically active population underemployed or out of the labor market and need to seek an alternative to the spending ceiling.

On the other hand, Lacerda sees a chance for the country to free itself from what he calls an economic agenda “Chicago 70s absolutely outdated” and misaligned with the practices of major world economies since the financial crisis of 2008/2009.

For him, in addition to the macroeconomic challenges, there is a set of competitiveness policies —industrial, commercial and science, technology and innovation— that require State action.

“The new government will receive a difficult legacy. It will inherit great expectations, after the disaster that will have been the Bolsonaro government, with a very challenging economic agenda that will require a lot of technical competence and political skill,” he says.

“The business environment is absolutely inhospitable and the role of public policy and the state has diminished. This needs to be reestablished.”

Another point that should demand more attention from public policies is the reversal of the country’s image in relation to the environmental issue. The perception of foreigners that Brazil has left the right course on the green agenda increases pressure on Brazilian companies that export or seek global capital, already scaring away large investment funds and putting even the trade agreement between Mercosur and the European Union in check.

For Juliano Assunção, executive director of the CPI (Climate Policy Initiative) Brazil and professor at PUC-Rio, this is an easier issue to solve, as the scenario can change quickly if there is a change in the government’s policy orientation in this area.

According to him, the main point on this agenda is the fight against deforestation in the Amazon, due to the importance of the issue from an environmental and economic point of view, and also because of the sensitivity of the issue on the world agenda.

“We managed to develop a super effective system for monitoring and combating deforestation. But we discovered that this system is exposed to the political cycle”, he says.

Assunção says that when the government goes against the global agenda of valuing environmental issues, it transforms something that should be a competitive advantage into a problem that also brings costs to the productive sector in the country.

“What we are seeing in Brazil, which should benefit from this process, is that we are giving up on this. The Brazil cost has always been associated with the difficulty of doing business in the country, and now we have a new element that has the to do with this environmental issue, in which the Amazon is perhaps the most evident point.”