When Jair Bolsonaro was running to be president of Brazil last year he proudly boasted that he knew nothing about economics.
But he managed to swing most of Brazil's business community behind his far-right campaign by promising to appoint University of Chicago-trained economist Paulo Guedes to a new turbocharged economy ministry.
Well known as a successful financier, Guedes’s mission would be to unleash Brazil’s potential by freeing the economy from what liberals see as an interfering state that they blame for the country’s laggardly economic performance in recent decades. Local markets loved the idea and rallied strongly.
That confidence in a self-declared economic ignoramus, abandoning what his three-decade long record in public life shows to be a rigidly statist world view to suddenly oversee a liberal revolution is now being put to the test.
Diesel price rise
Last week state-controlled oil giant Petrobras cancelled plans to hike diesel prices following a phone call from Bolsonaro. The company's president denied any political interference but markets thought otherwise, marking the stock of Brazil's biggest company down by more than 8 per cent in a single session.
The move reeked of the sort of political interference that has long bedevilled Petrobras and, amazingly, echoes the illiberal price control regime imposed on it by former leftist president Dilma Rousseff, which helped bring the company to its knees.
Guedes, who is known for his high opinion of himself and his abilities, was left looking foolish when reporters accosted him leaving a meeting at International Monetary Fund headquarters in Washington. Asked about the president’s veto of the price hike, he said he had no idea what they were talking about.
Now back in Brazil, Guedes has since defended Bolsonaro’s interference, saying it helped avert a strike by truck drivers that would have crippled the economy. The minister, with bigger liberal fish to fry, appears to have decided that discretion is the better part of valour and that ceding to the truckers buys the government time to advance its structural reforms.
Despite last week's sell-off, many market observers agree, saying their focus remains on the chances of Guedes pushing a major pension reform through Congress. "Everything depends on when this reform will be approved," says Pablo Spyer, a director with Mirae Asset Wealth Management in São Paulo.
Few disagree that Brazil’s pension system is both socially unjust and fiscally ruinous and in dire need of reform before an ageing population blows up the country’s finances. But reforming it has defeated far more capable presidents than Bolsonaro, whose first 100 days in office were marked by chaos and a rapid deterioration in the executive’s relations with the very Congress that must vote Guedes’s reform through by a two-thirds majority.
Pension reform
That’s why Bolsonaro’s decision to veto the increase in diesel prices has left many wondering about his chances of passing a meaningful pension reform. The rapidity with which Bolsonaro ceded to their demands to block the price hike has shown others that, despite promises to roll back the state, the president is willing to use its power to favour well-organised sectional interests, exactly the sort of approach liberals blame for the country’s economic malaise.
Petrobras did announce a more modest increase in diesel prices on Wednesday night, but only after the government unveiled a financial aid package for truckers. "It is a terrible signal on the part of the presidential palace and many people have picked up on it," says André Pereira César of the Hold political consultancy in Brasília.
Groups set to lose out from the pension and other reforms now know that well-organised pressure can force the president off the liberal path he never once advocated before last year’s campaign. This could lead to the pension reform being “dehydrated” in local political parlance, as powerful interests lobby to have their members excluded from its full impact. Already Bolsonaro’s former colleagues in the military have managed this and other categories are inevitably demanding similar treatment.
Should they get it, Bolsonaro’s alliance with markets, and the short-fused Guedes, will likely fall apart and increase the sense of chaos and incompetence already swirling around his young administration.