Robert Amsterdam on Political Risk in Bolsonaro’s Brazil


Writing in Latin Trade magazine, Amsterdam & Partners LLP founder Robert Amsterdam writes on the geopolitical risk issues facing investors in Brazil as the new President Jair Bolsonaro. Excerpt below:

The exaggerated enthusiasm of global investors and multinational companies long frustrated by the country’s wearisome business environment may come to endanger their ledgers in the long run.

Entirely overlooking Mr. Bolsonaro’s admiration for Brazil’s past military dictatorship and his inflammatory rhetoric, Brazilian and global investors expect that the arrival of his administration portends a new era of deregulation and fiscal conservatism that may unlock Brazil’s full business potential.

The president-elect’s promises to slash the deficit, reform the country’s convoluted tax system, and tackle the boogeyman of pension reform have all been well received. The day after polls closed in October, the Ibovespa index, the benchmark Brazil stock index, rose 0.9 percent, capping the index’s 16 percent gain and unmatched performance during the preceding six weeks. And due in part to Bolsonaro’s decision to appoint disciples of the Chicago school to his major economic posts, the stock market and the real, Brazil’s currency, have both continued to appreciate since the election.

Surely, these promises and appointments are a breath of fresh air after more than a decade of leftist, interventionist and corrupt Workers’ Party presidents laid the groundwork for the country’s worst ever recession. The sobering reality, though, is that the incoming administration may have oversold its capacity to maneuver the minefield that is today’s Brazil.

The Brazilian economy has only recently begun to emerge from its recession, and still has yet to make it out of the buffer zone where it could easily slip back into the red. Despite being Latin America’s largest economy, the nation’s rates of economic growth, foreign direct investment and unemployment are far worse off than pre-recession levels, anxieties over a troublesome 2019 for the region, and for global emerging markets, will certainly apply to Brazil as well. And should the US-China trade war continue to escalate, Brazil will find itself dangerously exposed.

On the reform front, at face value, the appointment of Paulo Guedes as “super-minister” of the economy should augur well for the implementation of the liberal economic agenda Bolsonaro campaigned on. But it’s no foregone conclusion that the University of Chicago-trained economist will be able to transplant the model that produced the “Miracle of Chile” to Brazil.

The largest obstacle, of course, is pension reform, which if accomplished, would be a veritable “Miracle of Brazil” in its own right. But, as early rumblings already suggest, investors and multinationals are chronically overlooking the fleeting support that Bolsonaro’s administration enjoys in the legislature. Though he’s claimed he’s committed to cooperating with legislators from various factions, this is will only be feasible on an ad hoc basis, and such politicized legislation as would be required for any meaningful pension reform would prove tremendously difficult to marshal without a reliable nucleus of support. And when combined with an emotional, disillusioned electorate, this circumstance will apply to any major fiscal or monetary reform, including much needed tax reform, or privatization of state-owned enterprises.

What’s more, a close look at Bolsonaro reveals that he not who he’s spent the past six months saying he is. In his own 27 years as a congressman, the president-elect was a consistent supporter of statist economic and trade policies, where he opposed the same privatizations and pension reforms for which he’s advocated on the campaign trail. This record shows a worrying asymmetry between his demonstrated politics and his promised platform – a discrepancy that isn’t helped by his mercurial history of party affiliations. Investors should be exceedingly wary of taking Bolsonaro’s professed commitment to market liberalization at face value.

If Bolsonaro wants to put his money where his mouth is, he ought to take a lesson from some of his neighbors, namely the right-wing administrations in Chile or Colombia, where Sebastian Piñera and Iván Duque, respectively, are attempting to steward platforms similar to Bolsonaro’s own, where pension reform, security and deregulation are all hot button issues. Of course though, despite recent hiccups, both Piñera and Duque can still rely on a base of support in their respective legislatures that’s far greater than Bolsonaro can feasibly anticipate at this time.

The political risk implication for business and investment in Bolsonaro’s Brazil is simply this: Jair Bolsonaro is his own worst enemy. His relative ignorance of economics and his proclivity for inconsistent, reactionary policy positions certainly don’t demonstrate the level-headed resolve necessary to tackle the issues that’s undone many presidents before him.

Read the full article in Latin Trade.