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Bolsonaro Could Save Brazil or Fail Badly: Two Possible Scenarios

Bolsonaro Saves Brazil or Fails Badly: Two Possible Scenarios

(Bloomberg) -- Jair Bolsonaro, Brazil’s president-elect, is divisive, has no executive experience and says he knows nothing about economics. So, healing a deeply divided nation and putting Latin America’s largest economy back on track is a gargantuan task. But not necessarily an impossible one. There are scenarios in which things go reasonably well under the helm of the former paratrooper and scenarios in which things go woefully wrong. Here’s a quick look at how each of them could unfold.

WRONG

Despite pledges to unify the country in his acceptance speech, Bolsonaro is eager to plant a conservative flag early on. He embarks on a moral crusade to crack down on dissidents and cut minority rights, chewing up political capital and creating a lot of noise and distraction. At the same time he cuts off pork barrel spending to legislators as part of his anti-corruption pledge and denies allied parties traditional access to government posts. All of this antagonizes legislators. His strategy to negotiate via multi-partisan caucuses rather than through party chiefs fails. Negotiations in Congress turn into unmanageable retail horsetrading or outright stalemate.

The window of opportunity to approve structural reform measures, including a badly-needed pension reform or the privatization of state assets, begins to close. Prospects of slashing the budget deficit quickly, as was pledged, dim. Public debt continues to swell. Investors start getting nervous and dump Brazilian assets. Consumption and investment shrink. The economy tanks. Again.

RIGHT

Bolsonaro makes fixing the economy his top priority. He continues to tone down his inflammatory rhetoric -- as he did toward the end of the campaign and in his acceptance speech -- and he manages to forge a majority in Congress without using the pork that previous governments relied on. He offers token concessions to the multi-partisan caucuses -- relaxed gun laws for the arms caucus; cheaper credit for farmers; and education policies based on family values for the evangelicals -- in exchange for support for market-friendly economic policies. Onyx Lorenzoni is named in the days after the election as Bolsonaro’s chief of staff, as was widely expected, and he proves to be a deft negotiator in Congress.

The promise of moving more revenue from the federal to state and municipal governments generates support for an overhaul of the country’s unwieldy tax system that has been stalled for decades. A smaller, less ambitious pension overhaul and some state asset sales generate enough savings to narrow the budget deficit and at least brake the surge in public debt. In addition, tax cuts for companies and households boost investor and consumer confidence, helping the economy gain speed. Capital flows back into the country, financial markets rally, and Brazil is a hot emerging market again for the first time in almost a decade.

To contact the reporter on this story: Raymond Colitt in Brasilia at rcolitt@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, David Papadopoulos

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