We’re not in a position to relax, says top Brazilian economist Arminio Fraga
While complex political developments across Latin America and the rest of the world do not necessarily mean recession is around the corner, businesses and governments should be mindful of the associated risks, founding partner at Gávea Investimentos and former president of the Central Bank of Brazil Arminio Fraga told delegates at Latin Lawyer’s ninth annual M&A conference in São Paulo yesterday.
Businesses should be alert to the potential impact of divisive political developments around the world, such as the UK’s Brexit, the US-China trade war, and the possible re-election of US President Donald Trump. “With the US and China trade war, neither country can afford to look like a loser – that protectionism could cause issues. When you have the two largest regions in the world doing what they’re doing, it can have massive impacts on business,” explained Fraga, who was interviewed by Gabriella Antici, partner at asset management company Ace Gestão Global (ACE).
Fraga noted that Brazil is in very bad financial shape. “It isn’t just the federal government. Most states are in trouble, including some of the large cities,” says Fraga, adding that there is still not the required investment in infrastructure, despite the potential opportunities. Growth has been slow despite predictions for a 2% to 3% increase in GDP following the election of President Jair Bolsonaro last year. “There was a lot of excitement about not having a Workers' Party government and more liberal policies for the economy, but somehow that didn’t trigger an investment boom,” says Fraga, who says the country’s large government expenditure is part of the problem. Brazil spends about 35% of its GDP, of which 80% is spent on wages and social security. “Brazil is an outlier in this respect. Most countries spend about 60% or below. It’s not surprising that the government is failing to deliver,” he says.
Fraga says the solution lies in further legislative reform. Latin Lawyer’s conference took place in the weeks after a landmark pension reform was approved and the day after the government announced proposals to reduce tax breaks in the public sector by 10%, free up government funds to pay down public debt and ease budget rules to lower the government’s obligatory spending. Fraga suggested that such changes won’t be easy to bring about, considering Bolsonaro’s minority government and party in-fighting.
Fraga spoke positively about the government’s reform agenda, but noted that a tax reform is essential. While hotly anticipated by businesses, bankers and lawyers alike, making the necessary changes to the country’s complicated tax system will be a challenge due to Brazil’s federal government structure. “Tax is a huge barrier to business in Brazil - it’s difficult to do business across state lines. It brings complex federal issues to the table. With the reform, each state will want to make sure it doesn’t lose out, so the government will have to be very clear on what a reform will offer each state,” says Fraga. He also recognised that it will be difficult for the government to execute its proposed overhaul of public sector careers.
Despite social unrest across Latin America, Fraga is cautiously optimistic for the economic and political future of Brazil, noting that its problems are political rather than structural. “Politics are polarised in Brazil. There is a central position which is conservative, but it isn’t exactly an ideological one. Can this centre propose a candidate that will capture the minds and hearts of the people in Brazil? It’s possible, but it isn’t a done deal… But I haven’t lost hope,” he said, before adding; “We’re not in a position where we can relax.”
The conference was chaired by Francisco Müssnich and Monique Mavignier of BMA - Barbosa, Müssnich, Aragão, and Paola Lozano and Paul Schnell from Skadden, Arps, Slate, Meagher & Flom. Coverage of the conference will continue in the following days.