Bolsonaro’s Brazil: what is next?

Written by Mariano Soler. January 21, 2018. 

 

Jair Messias Bolsonaro, one of the most controversial political figures in Brazil’s recent history, was elected president on October 28 and was inaugurated on January 1. A former army captain and a lawmaker for over 25 years, Bolsonaro has pledged to break away from traditional politics and lead an effort to overhaul the state’s handling of the economy and public security. While markets have reacted positively to his electoral victory, such appraisal is partially only a reflection of mistrust toward left-leaning politicians.

 

This sentiment is a result of years of mismanagement on the part of former government officials from the Workers’ Party (PT) and coalition party members, many of whom are under investigations in corruption scandals. The epitome is former President Luiz Inácio "Lula" da Silva, under arrest for money laundering and passive corruption, and defendant in numerous other improbity charges. Bolsonaro embodied the anti-Lula and anti-PT candidate, bolstering him to electoral victory, and this helps explain, despite him being a career politician, his appeal as an outsider willing to take a hard stand against corruption.

 

Pundits consider Bolsonaro’s presidency will be marked by unpredictability. That said, one thing is increasingly clear. Whether popular or not, many of his decisions and policies will generate backlash and grievances within unions and state-run enterprises.

 

At Galat Intelligence we identified the main challenges for political stability and security in Brazil during Bolsonaro’s first year into office.

 

 

Security

 

According to the Brazilian Institute of Applied Economic Research (IPEA), 2016 witnessed an all-time high record of homicides, with 30,3 cases for every 100,000 inhabitants. Furthermore, owing to prevailing crime and recurrent clashes between heavily armed organizations in Rio de Janeiro, there remains a heavy military presence in the city. While security forces reportedly managed to lower homicides by 22% since February 2018, human rights organizations indicate that the number of deaths caused by security agents surged by 45%.

 

The decision to employ federal troops for law enforcement activities is a byproduct of poor funding of local police departments in recent years, especially in the aftermath of the economic crisis that paralyzed Rio de Janeiro state in 2016. Bearing in mind precedent of damaging police strikes over the last two years, which led to a series of violent incidents and unrest across urban areas, Bolsonaro has repeatedly suggested he would first and foremost put “the house in order” by strengthening the mandate of security forces. With this purpose in sight, the incoming president has appointed officials with military background in key ministerial positions, including the security and defense portfolios, and his vice president shares his army background.

 

Largely considered as a hawkish outlook by pundits and analysts alike, the perceived militarization of government will signal a shift from a “proactive” to “reactive” security approach. Whereas previous leftist governments sought to emphasize social development as a pathway to fighting crime, Bolsonaro’s administration will seek to harden judicial sentences and increase security presence across urban areas nationwide. These measures will most likely be supported by large sectors of society.

 

The strengthening of law enforcement agencies is likely to yield short-term results vis-a-vis low-level crime. Detractors will however argue that such measures will come at the expense of civil liberties, raising abuses on the part of security agents, as supported by the previously mentioned statistics. Indeed, the government seeks to modify policing statutes to allow policemen to use deadly force without previous warning, reduce the age of criminal responsibility, and subsequently introduce gun rights legislation to make it easier for citizens to acquire firearms.

 

More importantly, we assess the new security agenda will not necessarily have a considerable impact insofar as fighting organized crime is concerned. Brazil is noted among security analysts for featuring high levels of corruption within law enforcement, whose elements have connections with groups like Comando Vermelho and Primeiro Comando da Capital (PCC). These organizations possess sophisticated military equipment, as well as domestic and international connections. Despite repeated containment strategies over the previous decade, authorities have thus far been unable to undermine their influence. Considering comparable precedent in Mexico, where heightened military presence not only proved ineffective in curtailing cartel’s influence, but further encouraged groups to act more aggressively, there is potential for worsening levels of violence. Whilst unemployment and poverty are not poised to improve in the foreseeable future, the surging reach of the military in public life could alienate lower strata of society, inadvertently aiding the support base of criminal groups.

 

Contact us for customized assessments and forecasts regarding security in Rio de Janeiro or any areas of interest within Brazil

 

 

Economic and political stability

 

Brazil’s economy faces many challenges. According to official sources, fiscal deficit surmounts to 77,3% of the GDP, and unemployment is estimated at 12%. Although Bolsonaro is to some extent ambiguous regarding his economic views, suggesting his agenda may well integrate protectionist outlooks with market-oriented solutions, at this point he has merged indicated the Ministries of Industry, Commerce, and Economy into one body, in an attempt to tackle purported excessive bureaucracy and expenditure. The new overarching ministry is lead by Paulo Guedes, who subscribes to the Chicago school of economics, marked by strong liberal leaning. Moreover, the incumbent director of Santander Bank in Brazil, Roberto Campos Neto, has been appointed head of the Central Bank. Liberal economists have also been assigned to Petrobras, Brazil’s state-owned oil company, and to the Treasury (STN).

 

In all, the overture towards state-reduction and free enterprise marks a significant shift away from Keynesian-oriented policies under PT rule between 2003 and 2016. Perhaps more importantly, given the concentration of government ministries under Guedes’ leadership, the government will be better positioned to execute difficult if not controversial economic policies, avoiding intragovernmental disputes. These are poised to include a series of partial privatizations, fiscal reform, and further reduction of state-funded bodies and institutions.

 

Noteworthily, Bolsonaro has shut down the Ministry of Labor, which has often been closely associated with labor unions. These measures have the potential to attract investment after years of stagnation owing to labor regulations perceived in business circles as excessive and restrictive. However, these changes are not likely to contribute to stability in the country. There are at least 15,000 workers’ groups and unions in the country, many of which enjoyed political patronage from the PT. Party and union elements are highly intertwined, and precedent suggests they have resources and willingness to stage large, nationwide demonstrations to protest against austerity policies and pension reform, as was the case during Michel Temer's government.  

 

These issues will probably give way to increased political polarization in society and in Congress, which features more than 30 parties and yet no single one has more than 12% of seats. Governing against this backdrop will become the most important challenge Bolsonaro will face during his first year in office. While the reduction of ministries and the concentration of power within a circle of associates will effectively undermine Congressional prerogative, this governing style would certainly generate political backlash, translating into protracted demonstrations and strikes. This assessment is shared by rating agencies Moody's and Fitch, who have already expressed reservations over Bolsonaro’s ability to garner sufficient support to pass contested reforms to reduce state deficit. In short, despite appointing market-oriented figures in key positions, investors will probably remain wary of Brazil amid growing uncertainty. It is therefore possible that Bolsonaro’s administration will be forced to milden the content of controversial reforms in order to secure sufficient support to see them through.

 

Coupled with heated political debates at Congress, union activism will pose a considerable threat to social stability in the country. A share of left-wing protests has lately devolved into violence and unrest, and, according to our appraisal of the overall situation, grievances against Bolsonaro’s policies are only poised to increase.

 

Contact us for further background and the rationale behind these assessments, or to request customized assessments and forecasts regarding Brazil.

 

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