New Brazilian administration to boost economic growth
After the impact of the Car Wash corruption investigation on the Brazilian economy, the country tries to shake it out and resume the path to economic growth. The government’s agenda involves important reforms, opening the economy to international trade, and new regulations to make Brazil more business friendly to attract foreign investment. “That would bring huge opportunities in some specific sectors”, says Suelma Rosa, PhD, a Brazil-based political science and government affairs expert. In her capacity as the vice-president of the Institute for Government Relations, she talked to Pequod Advisory Group on a range of topics including the lobbying and government affairs industry, corruption, the rise of President Bolsonaro, investing in Brazil, along with comments on economic sectors ripe for investment. Her interview is part of the Emerging Markets Podcast: Brazil Series, produced by Pequod Advisory Group.
The Operation Car Wash inquiry has investigated the largest corruption scandal in Brazil’s history and has become a milestone in both the political and economic spheres. “It has already investigated almost 500 people, involved 18 companies, imprisoned more than 30 corporate executives, and it is still going on, because of the number of projects involved”, explains Rosa. In the last decade, Brazil hosted mega-events, the Olympic Games and the World Cup, which required a large number of infrastructure investments. Many of these projects have been in the Car Wash scope. “They are going project by project and going through different networks. Each network is an entire investigation by itself.”
Rosa notes that the Brazil’s largest infrastructure groups were at the heart of the operation, as authorities found that they were negotiating directly with government officials to decide which contracts they could take in exchange for bribes. The focus of the investigation was to understand how the negotiations happened and how the scheme's financial mechanism was designed to receive the money and send it abroad. The involvement of these companies in the operation had huge impact on their financial situation and, therefore, investments.
The rise of Bolsonaro
The Car Wash scandal was the main factor that drove the Brazilian elections and the victory of President Jair Bolsonaro (PSL) last year, according to Rosa. Bolsonaro was a federal representative of the State of Rio de Janeiro for 27 years before becoming president. As a former military man, he has specifically supported military and police institutions, from where most of his support derived. “He was unknown until he started leading a very controversial debate during the impeachment process of the president Dilma [Rousseff]. He was opposing her, but strongly claiming against the Labor Party [the government’s party]”, says Rosa.
Bolsonaro took advantage of the anti-corruption sentiment that engulfed the country. Before the election campaign began, he was not seen as a candidate who could really come to power, points out Rosa. “But the country needed something new, and voters perceived a politician with 30 years of experience as a newcomer, because he was not known at all.”
Corruption and the institutions
Although many people associate the current corruption debate in Brazil with specific political parties or economic sectors, it is historically the basis of the entire Brazilian political system, according to Rosa. "Like most developing countries, Brazil had no strong institutions in the past that could prevent corruption. As Brazil has strengthened its institutions over the years, so has its ability to investigate and promote justice."
For her, the Car Wash probe should also be perceived in a positive way, as it only happened because the institutions were strong. “At no other time in the country could we have the public prosecutor and the federal police working together on an investigation against an administration that was in power. The point now is how much these institutions are still vested in power and how much this will change the political culture in the country.”
Effects of corruption on the Brazilian economy
Besides the corruption scandal, Brazil has experienced intense political turmoil in recent years, leading to the impeachment of the president Dilma Rousseff in 2016, in a Congressional process based on allegations that she violated the budget law. “The impeachment year saw the lowest level of GDP, and after that the economy started to come back, but it did not grow, just kept close to zero. Then all expectations were deposited in the new administration," stated Rosa.
Part of the new government’s strategy to face economic problems is to focus on reforms. The social security reform advanced in the Brazilian Congress this year, and the tax reform has been debated. The economy is led by the minister Paulo Guedes, Bolsonaro’s economic promise during his election campaign. “Guedes, who is a super powerful minister because he combined five ministries into one, is delivering what he promised, but the reforms take time”, analyzes Rosa.
Overdue tax reform in Brazil
With the tax reform, the government intends to reduce the costs that companies incur when hiring employees in the country. The Brazilian labor code was drafted in the 1940s and provided for strong workers’ protection. Michel Temer, who acceded to the presidency after the impeachment of Dilma Rousseff, oversaw a round of labor reform, approving outsourcing and temporary hiring, for example, but did not change the tax system around it. “For every dollar a Brazilian receives as payment, the company pays another dollar in labor tax. The goal now is to reduce the labor cost in terms of tax. This is the preposition of the tax reform. "
The challenge to approve reforms in Brazil is the political structure. “Because of the huge number of [political] parties, 34, to build a majority in Congress is one of the most difficult processes”, says Rosa. Traditionally, the way that a president used to build a coalition, to ensure that he would have the ability to approve reforms, was dividing the ministries among different parties, notes Rosa. “It is not the case anymore. Bolsonaro has politicians as ministers, but it is not associated specifically with coalition building, and the political analysts are trying to understand how this will affect the behavior of votes in Congress.”
Foreign investments in Brazil
In addition to the reforms, Brazil is moving to further open its economy. “Brazil has been known as a protectionist country in terms of trade and has a very small share of the overall global trade flow considering the size of its economy”, points out Rosa. “We have had trade facilitation changes, which is a sort of regulation that does not need congressional approval, and the government approved what is called the liberty economy package, which is a number of concepts and small changes in bureaucracy.”
In Rosa’s opinion, minister Paulo Guedes is pushing the new agenda, although results are still wanting, as public-sector investment capacity does not exist due to state and federal tax debt. Guedes is also trying to build market confidence to attract private investment.
Another government strategy to stimulate the economy hinges on regulatory changes. “Lately, Brazil has been changing a number of regulatory environments that would bring huge opportunities in specific sectors”, says Rosa. One sector to pay attention to is oil and gas. “Petrobras had a monopoly in the market, extraction up to distribution, and now this is being broken and they are leaving specific businesses.” Some of the businesses are in the market to be sold, and some companies have already bought holdings that previously belonged to Petrobras.
Another sector that has seen changes is the mining sector, with opportunities in Amazon and Minas Gerais, for example. “They are facilitating for international investors to invest on mining operations, and there a lot of minerals available and a huge stock... This is something to be considered”, states Rosa. In addition, there are new market regulations for natural gas, that will change the cost of distribution and lead to opportunities in downstream sectors such as petrochemicals and fertilizers, according to her.
“There is also a number of privatisation processes to come. One is in the energy sector, where Eletrobras is being prepared to be privatised.” In infrastructure, the government is working on a package that involves water and sanitation, roads and ports. “In November, in an event in Sao Paulo called ‘Brazil Investment Forum’, the government will try to sell the investments they have in the portfolio and other investment opportunities”, informs Rosa.
Tech startups to boost the economy
Brazil is also vying to attract startups and technology companies as part of its investment strategy, according to Rosa. She sees three main areas. One is technology for agrobusiness, or agtech. “Brazil is a large producer of commodities, and technology related to this is heavily needed, like climate analysis, predictability, planning.”
Another area is technology related to mobility, which is a challenge due to the size of big Brazilian cities. “It is also associated to security because of the violence level in the major cities”, says Rosa. The third area of technology is fintech. “The Brazilian banking system was heavily dependent on technology because of the high inflation rate in the past. And technology to manage portfolios was developed in Brazil beforehand, compared to US and Europe. It is an opportunity and has been growing fast.”
Tune into the podcast interview Suelma Rosa.