FGV Report On Oct Election: Govt Won't Go Quietly

Brazil’s presidential elections are a far three months off, but the outcome of those elections will unlikely alter the government’s policy on social welfare spending or Brasilia’s role as lender and stringent regulator, judging by a collection of consensus interviews in the latest FGV Getulio Vargas newsletter.

FGV in Sao Paulo is one of Brazil’s leading business schools and economic policy think tanks.

Given the way the current government handled the economic crisis, and a look at stats on higher incomes in poorer and often ignored regions in the northern half of the country, Brazilians won’t settle for austerity any longer and surely won’t ask for it of an opposition leader.  It wasn’t austerity that got Brazil out of its two-quarter recession in 2009; it was solid bank regulations that kept major banks from gambling away the house, and high taxes and interest rates that were able to be trimmed agressively to keep the economy growing, among other measures. Those who remember the days of the IMF and the old Washington Consensus economic policy on Brazil…well those days are absolutely gone. No changing of the guard will bring that back.

Usually the only people outside Brazil who worry about elections are the big banks. They panicked when Luiz Inacio Lula da Silva, a union leader from the northeast, was on his way to presidential victory eight years ago. They learned to love him shortly afterwards when it became clear he wasn’t going to be the region’s next Hugo Chavez.  Hardly a peep was heard when Lula increased federal programs for the poor in ways comparable to the beloved presidents of the 1950s.

A colleague at Victoire Brasil Investments in Sao Paulo, a $250 offshore hedge fund, told me recently that the market is pulling for continuity in Lula’s chosen one — chief of staff Dilma Rousseff.  She is currently running neck and neck with President Lula’s former rival, Sao Paulo governor Jose Serra, according to a July 2 poll by Datafolha. Regardless of who wins, no one should waste time banging their heads against a wall over which way Brazil’s economic policy will be heading under new leadership. It will likely be heading in the same direction: a little bit of tax breaks here when the economy is sluggish; some regulation there when sectors are overheated (mainly mining).

FGV economist Regis Bonnelli, in a section of the newsletter about the presidential race, wrote that the biggest question right now is whether the new government will be a more providing government (social welfare spending that makes investors worrisome because of current account deficits) or one more geared towards regulation (which makes corporate investors worried because return on investments can shrink). But the safest, money-on-the-table answer is “both.” The country is already devising new regulations for mining companies, putting stricter rules in place in an effort to avoid speculation in a sector that accounts for nearly half of Brazil’s foreign trade surplus. It is an industry too big and too important to implode should Chinese demand for iron-ore decline.

With regards to social welfare spending, Bonelli was non-commital: “Part of the success of the outgoing federal
administration is due to a variety of social programs. It would be interesting to evaluate the possibilities of increasing, reducing
the importance, or even eliminating some of them, especially considering that a large part of poverty reduction recorded in the past years was mainly due to the labor market, not income distribution.” Increasing, reducing and/or eliminating. That’s a wide playing field and – if economic policy decisions were made by the roulette wheel — is like betting half on black, half on red, and hoping it doesn’t land on green.

It is unlikely that Serra and Rousseff will discuss eliminating or trimming those programs during an election year because that would be like throwing in the towel. The northeast voted overwhelmingly for Lula and Serra will need a few of those states to beat Rousseff — possibly Brazil’s first female president — if he doesn’t want to be a two-time loser to Lula’s Workers Party.

If Brazil’s economy continues to grow above 5%, especially in the poor northeast, then arguments can be made to trim some social programs.  But that is highly unlikely seeing that the government still has a decent arsenal to protect itself from the kind of deficits foreign investors dislike, or continued sluggish demand from US and European importers. The main indicator for a haircut on welfare spending will be if the government was facing severe public debt burdens, which it is not. Poverty is still a major issue in the country’s underdeveloped north and northeast. And at this point in Brazil’s narrative, inequality has become an interest to everyday Brazilians in powerful states like Rio de Janeiro and Sao Paulo.  Massive poverty has finally become too shaming to a nation that survived the US and EU financial crisis in tact, and is home to the 2014 World Cup and 2016 Olympic Games.  That those two world events are a source of pride to everyday Brazilians cannot be underestimated. The world media will surely be pointing cameras at favelas in Rio and in the northeast and wondering…if they got all the money to build this stuff, why are children still drinking dirty water and living on the equivalent of two bucks a day?  So by comparison, while the US electorate and some pundits can talk about how government spending is sending America to a Soviet-style existence, in Brazil, only foreigners get worked up on spending. (And Manhattan Connection’s Diogo Mainardi, Brazil’s sourpus pundit who rarely has a good thing to say about the ruling party, or anyone for that matter.)

According to FGV: from 1999 to 2009, the government’s total spending (excluding interest payments) rose 4 percentage points (from 14% to 18% of GDP). Of the total growth, 3 percentage points (70% of the total) are attributable to increased spending by the Social Security (INSS) and other social agencies. Education and health spending have also increased since 1999. The total cost of the Unified Health System (SUS), a poor man’s version of US Medicaid, jumped from R$11 billion to R$35 billion, almost doubling its share in GDP.  (By comparison, the US Congressional Budget Office projects US spending to be  17.2 % of GDP this year.

A look at some numbers:

* Brazil 2009 Trade Surplus was $25.3 billion. 50% of that came from mining sector. The sector will see stiffer regulation next year. — Brazilian Mining Institute, Brazilian Foreign Trade and Development Ministry

* Brazil Public Investment (as % of GDP)
In 2008: 1.4% for government owned companies (think oil major Petrobras) and 0.9% for Fed programs (education and health)
In 2009, it rose to 1.9% for government owned companies and then 1% for Federal programs.
Already in 2010 it is 2% for federal owned companies and 1.2% for fed programs as of April. — FGV “The Brazilian Economy”, July 2010 with data from Finance Ministry

* Government owned Brazil National Social and Economic Development Bank to increase lending by 10% yoy. BNDES, as it is known, will invest at least $120 billion annually to reach a target of R$850 billion (around $460 billion) between now and 2014. Most of it to exporters and infrastructure build-out. — Luciano Coutinho, BNDES Pres, in May 10 interview published in Estado de Sao Paulo newspaper.