March 2, 2021

The two faces of Brazil with Bolsonaro: growth and precariousness

Brazil’s economy has experienced two opposite realities in Jair Bolsonaro’s first year in power: the euphoria of the financial market and a slight economic growth in the face of the precariousness of a still depressed labor market.

Since assuming the Presidency, on January 1, the ultra-rightist leader has left the reins of the largest economy in South America in the hands of his minister Paulo Guedes, a rigid ultra-liberal from the Chicago School.

With that power, Guedes drew up an aggressive policy based on structural reforms, privatizations, concessions and austerity, in order to reduce as much as possible the size of the State and rebalance the battered public accounts.

Brazil came from two consecutive years with growth of around 1% that had failed to reverse the deep 7% drop recorded between 2015 and 2016.

Faced with this delicate situation, the Bolsonaro Government has barely been able to pass a draft reform in its first year – that of pensions -, slightly reduce its expenses, inject liquidity through the release of labor guarantee funds and start its broad privatization plan.

The Central Bank joined the cause by lowering the basic interest rate to the historical minimum of 4.50%, based on low inflation, currently at 3.27%.

For economic operators it has been enough and this has been reflected in the Sao Paulo Stock Exchange, which in 2019 has renewed its maximum several times and is expected to close with an annual increase above 30%.

For the common Brazilian not so much. The industry still has high levels of idleness, unemployment has been installed in the double digits (11.2%) with a record informality rate, while the real has depreciated about 4.5% against the dollar, which at the end of November it reached its maximum when it was sold to 4,258 reais.

THE FACE A: improvement of indicators and slight growth

The most optimistic forecasts indicate a gross domestic product (GDP) growth of 1.2% for this year and 2.2% in 2020, according to the Central Bank.

After a first semester in which it touched the technical recession, Brazil accelerated in the final stretch, driven by services, industry and the agricultural sector, which expected record harvests for 2019 and 2020.

The adjustment policy has also slightly reduced the nominal fiscal deficit from the equivalent to 7.09% of GDP with which it closed 2018 to 6.44% last October.

And it is expected to decrease further after the controversial pension reform, which imposed, among other hard measures, a minimum age and with which the Executive calculates to save 855,000 million reais (about 210,000 million dollars) in 10 years.

That reform and the expectation of approving in 2020 a tax and an administrative one, which aims to reduce the salary for new officials, have led to “country risk” to its lowest level in nine years.

“It was a good year because progress was made on some fronts. Brazil needs to continue with fiscal austerity without spending less than it collects so as not to hinder growth,” says Joelson Sampaio, professor of economics at the Getulio Vargas Foundation studies center (Efe). FGV).

LA CARA B: unemployment, informality and political friction

But that timid recovery has not been enough to warm the labor market. The unemployment rate in November stood at 11.2%, equivalent to almost 12 million people.

Bolsonaro assumed his mandate with unemployment of 11.6% that reached 12.4% in February. From there it fell, but mainly driven by informality, which has grown to reach a record 41.1% of the employed population (38.8 million people).

The streets of the big cities of Brazil have been filled with self-employed workers, such as Filipe Augusto Marques, 25, who for seven months has been pedaling in Sao Paulo for an average of ten hours a day for a monthly salary of 2,000 reais ($ 450) ).

It is one of the thousands of young mobile application dealers who have given up looking for a formal job in the absence of opportunities.

Lucas da Silva, a computer technician, also chose to distribute food by bicycle and is pessimistic: “I don’t see anything change for the better. Many talk about recovery, but I see it stuck.”

“Brazil continues to have insufficient demand, high debt and a private sector without stimuli to invest,” explains economist Nelson Marconi of the FGV.

The fiscal crisis and the lower collection resulted in Brazil borrowing up to 78.3% of its GDP (reached the record of 79.8% in August), when at the beginning of 2014 it did not reach 60%.

For its part, Sampaio admits that 2019 could have been a better year if the Government and Congress had collided less and collaborated more, something that is of concern to investors.

In addition, the external scenario is also challenging. The commercial war between China and the United States is still alive and the wave of protests in several Latin American countries forced the Bolsonaro Government to put the brake on its liberal-cut reforms for fear of contagion.

Carlos Meneses Sánchez


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