While Bolsonaro’s government struggles to deliver economic growth, Brazil’s complex political scenario and volatile regulatory environment require investors to conduct a robust political risk assessment.
The inauguration of Brazil’s far-right Jair Bolsonaro’s government in January 2019 generated robust market euphoria at the prospect of liberal reforms to rescue Brazil’s economy following a 2-year recession in 2015 and 2016. In the aftermath of Bolsonaro’s election the country’s main exchange, Bovespa, traded at record highs, and Brazil’s currency had seen its strongest levels since last October’s election. Bolsonaro’s chief economist, Minister Paulo Guedes, promised a “free-market revolution” based primarily on pension reform and mass privatizations. However, the honeymoon may be over as Brazil’s economy shrank in the first quarter of this year, for the first time since 2016, as investment fell further, raising the stakes that the country could slip into another recession. Additionally, the Bolsonaro government has shown that controversial political positions and regulatory measures, emerging accusations of corruption leveled against the President’s son, and disagreements involving the military members of his cabinet may threaten Bolsonaro’s economic agenda and pose serious reputational and commercial risks to international investors.
Brazil’s recent positions regarding environmental policies have been deemed “an unprecedented threat to the Amazon,” and faced international criticism, with potential commercial repercussions. Measures causing concern around the world include the transfer of environmental regulations from the Ministry of Environment to the Ministry of Agriculture, including authority over Indigenous lands, and the extinction of the Secretariat for Climate Change and Forests, as well as Bolsonaro’s plans to privatize the Trans-Amazonian highway, and his threats to abandon the Paris Climate Agreement. On January 4, 2019, the Washington Post published an op-ed suggesting that “Western consumers, companies and governments should eschew products coming from deforested tracts, and they should press Brazilian business partners to do the same.” And in May 2019, an NGO that monitors the Amazon released new data that shows the pace of deforestation has increased 20% in the past nine months.
The new government, elected partially on its commitment to free Brazil from corruption and criminality, has grappled with a number of snowballing accusations involving Bolsonaro’s eldest son, Flavio. The newly-elected Senator has been under scrutiny in connection with a series of suspicious bank transactions involving his former aide at the Rio de Janeiro state assembly amounting to over USD300,000, which were flagged by financial regulator Council for Financial Activities Control (COAF). Press reports have suggested that these transactions could pertain to a “no-show” scheme, in which Flavio collected part of the salary of people he employed at the state legislature, with the help of his aide. Furthermore, in February, Brazilian investigators announced that they had opened a money-laundering investigation into unexplained increases in Flavio’s net worth, in connection with these transactions, and his purchase of two luxury apartments in Rio de Janeiro. Additionally, during the last week of January, domestic and international press reported that Flavio Bolsonaro once employed in his office at the state assembly the mother and wife of a fugitive former police officer and militia leader, raising concerns about his connections with paramilitary groups. These ongoing and politically sensitive investigations will test the strength of Brazil’s institutions, and in particular the judiciary’s ability to conduct the matter in a manner that promotes confidence and impartiality.
On the economic front, Finance Minister Guedes, a former investment banker with no previous political background, continues to face challenges negotiating reforms with Brazil’s Congress, in which the government has yet to build a majority. He’s encountering strong resistance to his proposed changes to the pension system, which include substantially raising the retirement age in order to save up to USD 345 billion over the next decade. In a recent interview, Guedes threatened to quit if his plans to overhaul the social security system, which have yet to gain widespread support from the public and politicians, were watered down and diluted. Furthermore, the far-reaching privatizations envisioned by Guedes may face resistance among the military and nationalist members of the cabinet, who perceive oil production, for example, as a strategic industry for the country.promotes confidence and impartiality.
Uncertainty concerning reforms will likely keep investments on the sidelines, and further undermine confidence in Bolsonaro’s administration. However, Guedes insists that the economy will see a turnaround in the coming month, but admitted that delays in reforms could undermine future growth, which could risk a new recession. While the GDP drop in the first quarter was due to a number of factors, including an ongoing recession in neighboring Argentina, Investors must assess the risk of investing in Brazil’s potentially abundant opportunities from broader political and social perspectives and an industry-specific standpoint. This assessment requires a nuanced consideration of the country’s institutional stability and internal political struggles, its international reputation, and the regulatory and political challenges faced by different industries.