(Bloomberg Opinion) -- Until not long ago, Brazilian President Jair Bolsonaro was having a pretty good pandemic. The virus had devastated the country, but not his government. A lavish package of emergency assistance rescued the crashing economy as well as his approval ratings. And when Bolsonaro caught Covid-19 after months of flouting health protocols, he recovered quickly, adding spit polish to the conceit that the scourge which had turned Brazil into the world’s second-worst killing field was beatable.
Not even the sheaf of impeachment petitions lodged against him for his apparently feckless handling of the pandemic, deforestation in the Amazon and crooked cronies proved to be much of a worry, thanks to the ethically challenged lawmakers he’d befriended in congress.
Whether Bolsonaro can keep up the grift, never mind win reelection in 2022, is unclear. What’s hard to ignore are the symptoms pointing to a troubled year ahead, including a torpid economy and likely more social sacrifice, with barely a whiff of salutary reform.
Bolsonaro spent a good part of the year at war on many fronts: dissing medical science, jousting with the media and thrashing communism, real or imagined. What he neglected to do was lead, insofar as that means setting policy priorities, detoxifying the national debate and marshaling legislative votes for the structural reforms that Brazil badly needs.
Despite bullish talk of reaping a fortune from selling off government assets, none of the 46 government-owned companies earmarked for auction has been privatized, although Bolsonaro’s administration created a new one last year and is weighing another. An overhaul of the federal bureaucracy could bring crucial savings, and yet the government took until September to send its modest bill for administrative reform (which covers only new hires) to congress, where it languishes. A more robust tax reform, which could simplify Brazil’s jungle of levies, has fared no better, perhaps because it was conceived outside the presidential palace.
The lacuna matters. Although Brazil’s markets are stirring again, none but the most devoted Bolsonaristas are touting a sustained recovery, much less a V-shaped rebound. (Look instead for a square root — a V-shaped uptick segued by a long plateau — as Banco Itau chief economist Mario Mesquita told Bloomberg News.)
Investor uncertainty has grown as new infections and hospitalizations spike again. The country’s bad bet on a problematic vaccine, on top of Bolsonaro’s apparently politically driven attacks on a promising Chinese shot, will delay widespread relief.
Then there’s Brazil’s underlying condition. It turns out that the country’s impressive resilience through the pandemic owes to palliative care. With the state of national calamity set to expire on Dec. 31, the generous emergency assistance and aid to struggling states and businesses, running to 18% of gross domestic product, will also lapse. As the primary fiscal deficit tops 12% of GDP and public debt hits 95% of output, Brazil will no longer be able to foot the bounteous aid bill for the stricken.
The least fortunate households have come to depend on this geyser of cash and credit. Even a partial reduction in the payout is now pushing millions of beneficiaries into indigence. Covid household vouchers were cut by half in September, sending 8.6 million back into poverty, according to a study by Daniel Duque of the Getulio Vargas Foundation. The number of Brazilians living in extreme poverty increased by more than 80% from August to September. Brazil’s notorious gap between haves and have-nots, which had receded with the emergency aid, also is getting worse, with the Gini coefficient rising nearly 1% during the same period.
One potentially bright spot is the fiscal turnaround in Brazil’s chronically overextended state and municipal governments. Thanks to emergency credits, aid and debt waivers, sub-national governments are flush with cash, boasting an average of 10% more net revenues this year than in 2019, according to a study by economist Marcos Mendes of the Sao Paulo business school Insper. After 57 straight months of fiscal crisis, the southern state of Rio Grande do Sul managed to pay its 340,000 public servants on time in November.
The problem is, Brazil can no longer afford such federal generosity. Only if local administrators use their windfall as a cushion to restructure — slashing overhead, trimming payroll and tackling loss-making pension systems — can the new money break bad old habits. In a land of official spendthrifts, that’s an iffy bet. Too often fiscal reprieve and waivers amount to little more than a budgetary shell game in which politicians take mounting public sector IOUs as a cue not to defend but to breach the government spending cap — a firewall against profligacy. “There’s always some clever politician in Brasilia eager to scuttle the spending cap,” Adriana Dupita of Bloomberg Economics told me.
Brazil could conceivably avoid that trap if its lawmakers channel their closet reformist and reject a fiscal adventurer or culture warrior as their new congressional whip in January. That’s a tougher call after the Supreme Court on Dec. 6 blocked the rules-bending re-election of the miserly incumbent lawmaker Rodrigo Maia to that post. “The alternative is that Brazil keeps muddling through,” said Dupita. “That’s an all too familiar mistake and could quickly lead to a full-blown crisis.”
The result could compromise next year’s budget, leaving the country with even less money to aid Brazil’s burgeoning new poor, never mind to halt a potentially deadly second coronavirus wave and the economic devastation that will follow.
Brazil did the right thing by spending aggressively amid the pandemic. Yet the failure to follow up the money transfusions with a plan for transformational reforms would amount to anesthesia without surgery. That’s no more a prescription for economic recovery than it is for a populist chasing reelection.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mac Margolis is a Bloomberg Opinion columnist covering Latin and South America. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”
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