Jose Olympio Pereira, CEO of Credit Suisse Brazil, is one of the most upbeat bankers I have ever met. Over the decade I have spent in the country, his outlook on the Brazilian economy has consistently been an outlier to the upside.
Olympio has gone through Brazil’s many challenges – its deepest ever recession, popular protests and impeachments – with a view that the glass, while perhaps not quite half full, is at least one-third full and sure to be topped up soon.
So, when I read that Olympio had told a local newspaper that he had “lost hope” with the country’s president Jair Bolsonaro and his response to the pandemic, it was significant.
It was hardly a shock that he had lost hope, given the gravity of the public health situation in the country, but the fact that he said it – publicly – is striking.
And he’s not alone.
In March, he was one of the more than 200 signatories to an open letter decrying the Brazilian government’s handling of the health crisis – and the economy.
Olympio was joined by many heavyweight names from banking, economics and business: Roberto Setubal and Pedro Moreira Salles – Itaú’s co-chairmen – both signed, as did ex-central bank presidents Ilan Goldfajn, Arminio Fraga, Gustavo Loyola and Persio Arida.
In truth, there was never real enthusiasm for Bolsonaro, but now the antipathy is out in the open
Senior bankers and economists have long criticized the Bolsonaro administration – even before the pandemic – in private. In truth, there was never real enthusiasm for Bolsonaro, but now the antipathy is out in the open.
For many of the letter’s signatories, the benefits of economic liberalism and reform trumped the far right pandering to the soon-to-be president. However, it slowly became apparent that Bolsonaro’s long record of statist and populist views would hold sway over economy minister Paulo Guedes’s ‘Chicago Boys’ view of economics.
Although important pensions reform legislation made it through Congress in the administration’s early days, significant further fiscal progress has been noticeable by its absence since then.
Important departures from government have tracked the growing disillusionment with economic reforms.
Salim Mattar, the special secretary tasked with taking an ambitious number of state-controlled companies through privatization, departed in August, as did Paulo Uebel, who was special secretary in charge of ‘debureaucratization’. Mansueto Almeida, a public debt expert, also left the government to become chief economist at BTG Pactual.
While the open letter focused on the government’s disastrous failure in managing the pandemic, the criticism extended to its economic mismanagement.
Fire-fighting
It is almost inevitable that Bolsonaro’s government will declare another national emergency in 2021 to enable it to provide fiscal support that the constitutional spending limit would otherwise prevent.
Brazil has now recorded more than 300,000 Covid-19 deaths and the daily count has accelerated to more than 3,000. The recession of 2020 is in danger of being repeated in 2021, and a record high level of unemployment – around 14% – persists.
The central bank is in fire-fighting mode – required to tackle a slumping currency and spiking inflation with monetary policy tools alone – and the country is creeping towards fiscal dominance. Higher interest rates and a very short-term debt maturity profile will inevitably lead to a higher financing deficit.
Capital Economics estimates that every 100 basis points increase in interest rates raises government financing needs by 0.4% of GDP, so the 400bp or so of rate rises anticipated by the market would translate to a rise of 1.6% of GDP – more than twice the size of the emergency payments that have caused fiscal worries to come to the fore in recent months.
A partial solution to the health crisis is vaccinations.
A solution to the financial crisis is much harder to diagnose. But there is not much confidence left in the old answer, which was, simply put: “Paulo Guedes.”
