Brazil’s Bolsonaro Starts a Populist Death Spiral

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Brazen, business friendly and proudly impolitic, Brazil’s Economy Minister Paulo Guedes had made his name in the trenches of financial markets but always hoped for more. He saw his chance in Jair Bolsonaro, the former military man turned rightwing provocateur, who weaponized his id to win the presidency. Together — Bolsonaro on the stump, Guedes with the suits — they would rescue Brazil from the cabal of statists, communists, social democrats and other presumed political invertebrates, and so unleash Latin America’s biggest underachiever with foundational free market reforms.

Tell me another one.

By firing Roberto Castello Branco, the president of Brazil’s state-owned oil giant Petrobras president last week, Bolsonaro not only crushed investor confidence and the oil major’s shares, he also sent Guedes and his liberal entourage for a pratfall. Petrobras’s plunge on Monday by some R$100 billion ($19 billion), 22% of its value, dragged down the Sao Paulo stock exchange by nearly 5%. The real tumbled against the U.S. dollar. Petrobras and Bovespa clawed back some value on Tuesday, but unless the dirigiste-in-chief pulls back, more losses look certain. Yet the more telling casualty may be the idea of any kind of a partnership between president and minister on behalf of real economic reform.

Bad as it looked, sacking the chief executive of the country’s biggest company, which is the president’s prerogative, wasn’t the cause of the stock market’s swoon, but the mise en scene. Before firing Castello Branco — one of Guedes’s confidants — Bolsonaro took to social media to lament a recent rise in fuel prices that “no one was doing anything about.” Yet the government’s own rudderless economic agenda had set up Brazil for the fall by undermining investor confidence, gutting the real and raising prices, including of internationally-pegged diesel and gasoline. Bolsonaro’s message was a populist valentine to restive truck drivers, some of his core constituents, who threatened to reprise a strike that paralyzed Brazil in 2018. He also vowed to share the love, hinting that tweaking electricity rates could come next. Beyond that is anyone’s guess: Brazil’s federal government controls 134 state companies.

In the Latin American Economipedia, nationalist leaders of left, right and center routinely play entrepreneur, mortgaging efficiency and transparency to cronyism and electoral advantage. Yet Bolsonaro had powered into office promising to end all that with a purgative dose of animal spirits.

The question is why anyone would have believed that possible of a man who spent 27 years in congress bashing communists while also shilling for statism and public sector privileges, especially for those in uniform. Enter Guedes, the University of Chicago-schooled market champion with his SparkNotes of capitalist orthodoxy, who provided the perfect bona fides for Bolsonaro to roll up the support of Rua Faria Lima, Sao Paulo’s Wall Street. On the campaign trail, Bolsonaro cheerfully deferred all the economic policy minutiae to Guedes, whom he branded his one-stop “convenience store” for policy and talking points. Little did Guedes know it was a buyer’s market.

The blood on the bourse suggests that many of Brazil’s “Farialimers” are having buyer’s remorse. In fact, Bolsonaro’s 25 months in office have been a carnival of executive errors. He turned the health ministry into a turnstile job, sending off two ministers amid a worsening pandemic before settling on a third, Eduardo Pazuello, an army general, whose most distinguishing feature was subordination. “One gives orders, the other obeys,” Pazuello said. His former justice minister Sergio Moro, the Guedes of justice, resigned after accusing Bolsonaro of meddling in the Federal Police, where Bolsonaro’s cronies and a son were under investigation.

The real surprise might have been if Bolsonaro had refrained from kibitzing on economic policy, a tale that only faith-based politics could explain. “Maybe they believed that Guedes would use Bolsonaro as a Trojan horse to drop liberal market reforms on an unwitting country. It looks instead like it ended up the other way around,” said Paulo Bilyk, chief executive of Rio Bravo Investimentos, an investment house.

Some analysts see a crude electoral gambit in Bolsonaro’s recent maneuvers. With a resurgent pandemic, a scarcity of vaccines, a prostrate economy and politicians arguing over how to pay for more emergency aid for the jobless without blowing up government accounts, the Bolsonaro government has seen its approval ratings sink. “Bolsonaro’s logic seems to be that the support he stands to lose in the market will be offset by gains in the popular vote, on the bet that the public has become more tolerant of fiscal overreach during the health emergency,” said Getulio Vargas Foundation political analyst Octavio Amorim.

It’s a gamble. Ask former president Dilma Rousseff, the hapless Workers Party leader who big-footed the power companies and Petrobras to control prices. She won reelection but wrecked the balance sheet of power companies, pushed Brazil into a record recession, saw her approval ratings collapse and her congressional base desert her, setting her up for impeachment. Memes showing Bolsonaro’s face transposed on Rousseff’s body have lit up social media.

Bolsonaro recently bought himself a reprieve by electing allies to head the Lower House of congress and the Senate, and striking a pact with a block of middlebrow rent-a-legislators known as the Centrao (Big Center). That indulgence will cost him patronage and pork, and it could evaporate if the health emergency deepens and the pandemic-ravaged economy fails to revive. “If the record is clear on one thing in Latin America, it’s that populist maneuvers that destabilize the economy lead inevitably to electoral disasters,” said Fernando Schuler, who teaches political science at Insper, a business school. The government’s house economic liberal might have shared that lesson, had anyone in the palace been listening.

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.”

©2021 Bloomberg L.P.

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