“Privatização,” despite the word's unpopularity even across polarized Brazilian party lines, has been one of the cornerstones of President Jair Bolsonaro’s administrative efforts to stimulate Brazil’s sluggish economy. Despite being unpopular, the administration’s privatization of state-owned enterprises (SOEs) has proven to be immensely successful, yielding a total net gain of US$23.5 billion within the first nine months, surpassing the government’s expectations by nearly 20 percent.
The Bolsonaro Administration has over 12 privatization projects in progress, with more to be announced in the coming year. Most of these projects focus on energy, transportation, and production infrastructure. Authorities of the Brazilian government cite the lack of investment funds for Brazil to maintain, expand, and operate facilities, resulting in a push of neoliberalism (market-oriented reforms) to open Brazil’s economy.
Despite being the world’s eighth-largest economy, Brazil’s economy lags greatly in competitiveness, placing 72nd of 140 countries, the United States ranks first, followed by Singapore and Germany. Brazil also struggles with the World Economic Forum’s “business dynamism pillar,” which accesses the private industry’s ability to adapt to changing markets, new business models and risks, and technological advancements. A contributing factor to such a low ranking, and frankly, a comparatively weakened private sector, is due to Brazil’s dependence on the public sector to develop, maintain, and safeguard national industries.
The nation’s 418 SOEs, one of the highest in the world, ranges from energy, transportation, and manufacturing infrastructure, to financial and health services. To note, Brazil has more SOEs than that of the 34 member nations of the Organization for Economic Cooperation and Development (OECD). Through the privatization of inefficient and non-profitable SOEs, the government can reduce its operational burden, increase market efficiency, and create a more robust private sector. Currently, many of the SOEs are unable to cover their operating expenses, and rather than generating profits, they generate more than US$3.8 billion in losses annually, furthering their dependence on government funding. which takes away from the country’s ability to invest in other social initiatives. In the Bolsonaro Administration’s detailed plan, the government plans to keep SOEs that provide critical public social services, while privatizing those that attract investors or generate losses.
Planned for the second half of 2020, the utility giant, Eletrobras (NYSE: EBR.B), is one of the largest SOE privatization projects (PL 5877/2019) taken on by the administration. In the reported 2019 third-quarter earnings, Eletrobras reversed its 2018 loss of R$2.26 billion (US$) by an increase in net profit of 132 percent to this year’s R$716 million (US$) profit. The drastic increase is a direct result of the concession of underperforming divisions and news assets beginning operations.
During his campaign, President Bolsonaro admitted to only understanding the basics of economics, putting his full backing in his Minister of the Economy, Paulo Guedes. Minister Guedes, a popular free-market economist, earned his Ph.D. from the University of Chicago. It is also important to note that in an effort to reduce harmful bureaucracy, President Bolsonaro merged several government ministries cutting the number from 39 to 22. Under this simplification, Minister Guedes became dubbed as the “Super Minister” of the Economy, as his ministry absorbed the Ministry of Agriculture (MF), the Ministry of Planning (MP), Ministry of Development, Industry and Foreign Trade (MDIC), and Ministry of Labor and Employment (MT).
The administration’s most recent political victory comes after Congressional approval for the highly controversial pension reform bill, which passed with a vote of 60-19 in favor, late October. The much-anticipated bill will save the public nearly a trillion reals (USD$200 billion) in the next decade. Among other measures, the bill raised the retirement age for men to 65 and women to 62, raised workers' pension contributions, and reduced burdensome regulations for businesses. Special rules will apply to teachers, police, and rural workers. The Brazilian Stock Exchange Index (INDEX: IBOV) rose 1.1 percent after the vote, to an all-time high of 107,197 points, and this growth continued to reach an all-time high on November 7th at 109,580 points. Pension reform has been a pressing and intractable topic that has been relevant for several decades, passing the reform is truly seen as an accomplishment.
The Brazilian Treasury reported that the public sector’s debt-to-GDP will reach 79.7 percent by 2022 and then decline, however, some estimates indicate that if the reform had not been passed then the ratio would have surpassed 100 percent. This would have increased Brazil’s fiscal risk and directly dampened investor’s outlook, a sentiment that the country’s market cannot afford. Moreover, Brazil’s Constitution mandates nearly 90 percent of all current public spending, providing limited flexibility in ensuring the nation’s
With the pension reform passed, Congress will now focus on the administration’s next priority: tax reform. In an interview, the Brazilian speaker of the lower house, Rodrigo Maia, explained that there is “no other reform is more important than the tax reform,” which is expected to be sent by Minister Guedes in the coming month. Like many aspects of the Brazilian government and doing business in Brazil, tax policy and filing taxes are extremely complicated due to excessive government bureaucracy. On average, it takes Brazilian employers nearly 2,000 hours to file taxes for businesses on account of the heavily bureaucratized system. Meanwhile, for the same task neighboring Argentina and Chile take 312 and 296 hours, respectively, while OECD (Organisation for Economic Co-operation and Development) members take about 161 hours. To note, Brazil is in the process of joining the OECD and secured the Trump Administration’s support earlier this year. The process is also helping Brazil push the necessary reform to create sustainable economic growth.
Brazil’s economic reform success continues abroad as Reinaldo José de Almeida Salgado, Brazil’s Foreign Ministry’s secretary for bilateral negotiations with Asia, stated that Brazil does not “intend to be selective in relation to trade opening,” a centerpiece of Bolsonaro’s market-friendly administration. It has already begun the process of signing trade protocols and agreements with nations globally.
Ultimately, by developing a stronger private sector, Brazil’s domestic industries can continue to push for greater productivity and efficiency and compete in the international markets. Although controversial, the Bolsonaro Administration continues to push for reforms to make Brazil more attractive to investors and to control the government’s quickly rising debt which limits its capacity to improve the quality of life.