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Feb 1, 2019

Wold I Politics: Bolsonaro's pro-market agenda faces its first test of confidence as Brazil's Congress returns

Sam Meredith




Bolsonaro Brazil 190122 EU
Brazilian President Jair Bolsonaro is pictured during the signing of an agreement with Argentina's President Mauricio Macri (out of frame) at Planalto Palace in Brasilia, on January 16, 2019
EVARISTO SA | AFP | Getty Images
The real business of governing for Brazil's newly-elected populist president starts on Friday, when Congress returns from an end-of-year break to discuss Jair Bolsonaro's ambitious pro-market reforms.
Market participants are cautiously optimistic about big changes taking place in Latin America's largest economy, with Brazilian stocks fast-becoming one of Wall Street's favourite investment destinations.
Shortly after his inauguration at the start of the year, Bolsonaro touted a "new Brazil " at the World Economic Forum (WEF) in Davos.
The far-right leader also promised to transform the country into one of the most business-friendly places in the world during his time in office.
"Provided he passes unpopular issues such as pensions reform during his honeymoon period, then other free-market measures won't need as much backing," Robert Wood, a Brazil analyst at the Economist Intelligence Unit, told CNBC via email on Friday. 
'Something has got to give'
The government's plans for economic reform hinge, almost entirely, on pension reform.
The ruinous pension system is at the heart of Brazil's fiscal deficit. So, unless it is tackled quickly, many investors worry the country's public debt burden could soon spiral out of control.
In addition to this, around 50 percent of Brazil's already "extremely restrictive" budget is used to pay pensions, Carlos Caicedo, senior principal analyst for Latin America at IHS Markit, a London-based research firm, told CNBC via telephone on Thursday.
"Pension spending is growing, and the deficit is also growing. At some point you are going to reach a time when something has got to give — and that is probably pensions," Caicedo said.
Front-runners for the leaderships of both houses are expected to support Bolsonaro's economic plans. But, it is not clear whether he will be able to win enough support from other lawmakers in order to secure a lasting majority.
Brazilian right-wing presidential candidate Jair Bolsonaro speaks to supporters during a campaign rally in the district of Ceilandia.
EVARISTO SA | AFP | Getty Images
"Bolsonaro will try to stitch up a majority on an ad hoc basis via cross-party interest groups (law and order, evangelical groups and farmers) rather than through a formal coalition of a dozen or so parties as in the past — That system became synonymous with corruption and pork barrel politics that he campaigned against," the EIU's Wood said.
Pork barrel politics refers to government spending specifically intended to benefit constituents of one particular lawmaker, in return for their political support.
Centrist parties traditionally rally around the newly-elected president in Congress in exchange for so-called pork and privileges.
However, Bolsonaro has pledged to take adopt a different approach.
The 63-year-old campaigned on a promise that he would seek to mobilize his supporters to pressure lawmakers. He also said he intends to scrap negotiations with opposition party leaders in favour of talks with cross-party caucuses — such as law-and-order hardliners, farmers and evangelicals, also referred to as the "bullets, beef and Bible" bloc.
Graveyard for reform
Brazil's Congress will resume legislative activities from Friday with one of the highest rates of new members since the country's return to democracy three decades ago.
The government's proposal for pension reform is expected to be sent to the legislative houses by the second week of February.
Market participants are anxious to find out whether the plans are likely to pass, with meaningful structural reform likely to unleash a wave of new investments into the country.
Nonetheless, a significant uptick of new members is not expected to dramatically alter Congress' reputation as a graveyard for meaningful reforms.

Source: CNBC


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