As Bolsonaro Takes the Reins, Brazil Economy Czar Fades Away

(Bloomberg) -- Paulo Guedes joined the administration of Brazil’s Jair Bolsonaro in 2019 as a super minister charged with steering Latin America’s largest economy through an ambitious program of privatizations, deregulation and tax and spending cuts.

Two years later, it’s the president who’s increasingly calling the shots and moving away from his star minister’s market-friendly agenda, despite acknowledging openly that he knows little about the economy.

Bolsonaro’s decision to replace the head of state-controlled oil company Petrobras after a feud over fuel prices sent Brazilian markets into a tailspin on Monday, with investors viewing the move as a sign that the Guedes era is drawing to a close.

Guedes’s political future is a matter of concern for many investors who see him as the last line of defense against Bolsonaro’s natural inclination toward interventionist policies. The stakes are rising as Brazil’s economic recovery sputters and Bolsonaro increasingly dwells on the 2022 presidential campaign, a race that is beginning to look like an uphill struggle as his popularity drops following the expiry of a program of pandemic aid to the poor.

Guedes is now “in a complicated spot,” said Sergio Vale, chief economist with MB Associados.

“The impression is that he no longer has the strength he had in 2019,” said Vale. “With the president looking at re-election, prices climbing as they are and his popularity this low, the economy minister ends up being steam rolled -- like he was now.”

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The Petrobras CEO’s ouster underscores Guedes’s waning standing in the cabinet since it mirrors a similar confrontation in 2019, when the president suspended a planned fuel-price hike by the oil company. Guedes responded then that he would “fix” the situation.

This time, he’s remained silent as he watched the treatment of Roberto Castello Branco, the outgoing Petrobras chief executive officer who was a colleague from the University of Chicago. Guedes personally invited Castello Branco to join the government and help him implement the pro-market economic policies for which the school is famous.

On Tuesday, Guedes canceled his participation at an online event discussing Brazil’s bid to join the Organisation for Economic Co-operation and Development. His office said he was busy negotiating his reform agenda with the lower house speaker, but declined to comment for the story.

Obstinate, Defeated

The fact that Bolsonaro no longer shows any scruples about undermining Guedes’s agenda, as one person familiar with the president’s thinking described it, leaves investors and former members of the economic team wondering what is keeping him in office.

“Guedes is resilient, obstinate and determined, but he did not realize that he was defeated,” Salim Mattar, former privatizations secretary and a close friend of the minister, said in an interview to newspaper O Estado de S.Paulo over the weekend. Mattar stepped down in 2020 saying he was frustrated with lack of progress in the privatization program.

Later on Tuesday, Bolsonaro praised his economy minister, saying he plays a key role in the fight against Covid-19 as he holds the key to government finances.

Guedes doesn’t want to step down before building an economic legacy he can be proud of, according to three government officials close to him. Yet he has started to signal that his future in government hinges on the fate of an emergency bill that lawmakers are set to start voting on Thursday.

The constitutional amendment would allow the government to bypass fiscal rules for a second consecutive year to provide another round of cash handouts to poor Brazilians. In exchange, it establishes a new crisis protocol for future emergency spending. Even if approved as suggested by Guedes, the proposal pales in comparison to his initial plans to reinstate fiscal austerity in Brazil this year.

The Economy Ministry declined to comment for this story.

The outlook for additional austerity reforms in congress also looks uncertain under the leadership of Lower House Speaker Arthur Lira, elected this year to replace Rodrigo Maia. While more politically aligned with Bolsonaro and willing to deliver on some reforms, the new speaker has no commitment to Guedes’s agenda, according to a top lawmaker close to him.

Instead, the legislator said, Guedes will have to navigate even more troubled waters from now on since Bolsonaro is making it increasingly clear that he’s not willing to follow the recommendations of his economic advisers.

“Of course the new house leadership is more tolerant of interventionism,” said Kim Kataguiri, a lawmaker critical of Bolsonaro who is deputy leader of the center-right Democrats party. “Lira has been elected on a public spending platform and, behind the scenes, he is a fierce critic of economic liberalism.”

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