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Time Is Running Out on Brazil’s New Pro-Market Proposals

Martha Viotti Beck and Mario Sergio Lima
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Time Is Running Out on Brazil’s New Pro-Market Proposals

(Bloomberg) -- Brazilian President Jair Bolsonaro may have just eight months to secure lawmaker support for an overhaul of Latin America’s largest economy before local reelection campaigns redefine legislative priorities.

After a pension reform became law this month, Bolsonaro’s administration is now prioritizing measures that increase control over the federal budget, which currently is in deficit to the tune of 6.4% of gross domestic product.

Yet the risk of a weakening economy in the run-up to next October’s municipal elections means Bolsonaro has little time to spare before politicians’ support for belt-tightening measures evaporates and voters begin pressing for greater fiscal stimulus. In the past 20 years, multiple presidencies have relied upon spending to drive economic growth, though often to the detriment of public accounts.

“In Congress, there’s a window of opportunity until next July,” Special Pension Secretary Rogerio Marinho said at an event last month. “Starting in July, political party conventions on municipal elections will begin. So, Brazil will have to pick its priority. Tax reform? Public sector overhaul?”

Bolsonaro’s administration is focusing on fiscal measures as Brazil’s economy is expected to eek out growth around just 1% for the third straight year. The legislative package includes proposals to toughen budget oversight, cut government payroll expenditures and implement mechanisms that would ensure spending laws are met. It aims to address lingering investor concerns over increasing public debt and continued fiscal deficits.

Read more: Bolsonaro Hands Congress Bills to Tackle Brazil’s Budget Woes

Loose government spending and rising liabilities have drawn investor criticism and prompted Brazil to have its sovereign credit rating cut to junk in 2015. Returning the country to investment-grade would consequently lower federal borrowing costs and draw in more capital to drive the economy.

Worker Uproar

At least five different proposals to amend the constitution are in the pipeline, representing a tremendous effort just as the approval of pension reform consumed a great deal of Bolsonaro’s political capital. To assure key votes on that bill, government officials had to yield to demands to hold votes on other measures, such as a proposal to divide up oil income between cities and states.

Intense negotiations and numerous concessions on the pension reform leave the government with less leverage in talks this time around, and the president still has to be convinced to fully embrace the new measures, according to a lawmaker aware of the discussions who requested anonymity. In a note published on Thursday, Fitch Ratings said "dilution, delays and shelving" of some of the government’s new proposals cannot be ruled out.

The recent release of former President Luiz Inacio Lula da Silva may further galvanize the political left in its opposition to Bolsonaro’s plans. Arguably one of the thorniest proposals entails eliminating over 1,000 of Brazil’s 5,500 municipalities starting in 2025 by forcing them to combine with other cities with stronger finances.

Read more: Lula Returns to the Fray With Release From Brazilian Jail

Uproar from current public servants worried about job stability has already put the government on the defensive, forcing the economy ministry to issue a statement affirming that their benefits would not be altered. There’s also no way Bolsonaro can avoid the known challenges of dealing with a fractious Congress that’s home to over two dozen political parties and no government majority.

“The government doesn’t have a base of support in Congress like previous ones, and it is going to have to prioritize,” said Lucas de Aragao, a political analyst at Arko Advice. “There’s not going to be enough bandwidth to pass everything.”

Read more: Bolsonaro’s Deal-Making in Spotlight as Brazil Congress Returns

Positive Trajectory

To be sure, some observers say Bolsonaro’s administration will be able to harness momentum from pension reform approval. Eurasia Group this month boosted Brazil’s long-term political trajectory to “positive” from “neutral” on views that party leaders in a pro-reform Congress will back new fiscal and economic bills despite the lack of a government majority.

“There’s a lot in common between the executive and legislative branches,” Bolsonaro, flanked by both Economy Minister Paulo Guedes and Senate President Davi Alcolumbre, said when he delivered the set of fiscal measures to Congress. “In no time at all, by the middle of next year, the proposal will become reality.”

Meanwhile, Brazil’s central bank has repeatedly said that continuing fiscal reforms is key to holding down inflation.

Still, there’s no shortage of reasons for caution going forward. For starters, over half of the population doesn’t trust Bolsonaro, according to a poll published in September.

Lower house Speaker Rodrigo Maia has already warned that deputies are unlikely to accept any measure that reduces social spending. Indeed, a recent spate of violent protests across South America serves as a reminder of how quickly stagnant economies and unpopular policies can spark social upheaval.

“It’s clear that some points may have to be modified,” said Fernando Bezerra, government leader in the Senate. “We’re working to try and approve the measures by April, 2020. After that, the focus turns to municipal elections, and it becomes more difficult to discuss complex proposals.”

(Updates with Fitch Ratings in 8th paragraph.)

--With assistance from Simone Iglesias.

To contact the reporters on this story: Martha Viotti Beck in Brasilia at mbeck96@bloomberg.net;Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Matthew Malinowski

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