Brazil’s Gentle Jair Jeers

Brazilian financial assets extended their late year tear as President Jair Bolsonaro was sworn in January 1 with harsh condemnation of previous “socialism” and a series of executive orders eliminating alleged vestiges in the Agriculture, Education and Labor Ministries. Economic policy chief Guedes, trained at the free-market monetarist University of Chicago and a successful banker and think tank founder, has presented a wide ranging public finance cleanup agenda including fiscal and pension reform, tax simplification and statutory central bank independence. State enterprise privatization will return to the mix, with Electrobras and other utilities likely up first for partial sale. The social security package, covering 40% of government non-discretionary spending, has not yet been finalized and may still incorporate elements of former President Temer’s doomed proposals. Congress with 30 parties is back in session in February, and the new team estimates support from 300 deputies, short of the two-thirds required constitutional amendment majority. The budget deficit and debt/GDP ratios were 7% and almost 80%, respectively in 2018, with sluggish 1.5-2% growth due to continue on below target 4% inflation. The benchmark 6.5% rate will stay on hold as a new central bank chief enters in March. Currency strength around 3.6/dollar should further constrain prices, but may cramp exports as a slight 1.5% of GDP current account gap is projected for the year. FDI inflows continue healthy at 4% of output, with $375 billion in reserves offering ample short-term debt repayment. China takes one-quarter of mainly agricultural overseas sales, and President Bolsonaro campaigned on a tougher trade and investment line against Beijing involving “all-front pressure” in admiration of the US Trump administration stance. He pointedly did not invite Cuba and Venezuela to the inauguration, but also vowed to stay out of Western-backed climate and migration pacts.

Mexico under AMLO’s fresh direction also enjoyed an initial honeymoon on anti-corruption and drug prospects, and renegotiation of the North American free trade zone within tentative border immigration understanding with Washington over Central American asylum-seekers. However manufacturing and non-manufacturing PMIs dipped below 50 in November and December, as investment was off 3% in the third quarter. Inflation was stubborn above 4.5% with the policy rate at 8.25%, and investor confusion mounted on mixed energy overhaul and public consultation signals. AMLO scrapped the modernized Mexico City airport following an informal referendum, and at first refused to honor infrastructure bonds issued before proposing partial reimbursement. The government once again hedged the international oil price, and increased Pemex’s budget almost 20% within an overall 2.5% of GDP deficit and primary surplus. Sporadic shortages resulted from truck instead of pipeline fuel delivery at home to avoid gangs, and the extent of Pemex-private sector joint ventures is still unclear. The President imposed wage restraint, taking a 60% cut on his own, but civil servant unions protest and filed lawsuits against the move. Colombia’s President Duque likewise basked in the immediate afterglow after assuming the post with the same 2.5% of GDP fiscal deficit aim, before tax reform legislation was watered down to yield half of original revenue. Business and Treasury bond levies will ease, but the Venezuelan refugee influx with President Maduro’s disputed re-election is a worsening charge on regional coffers and diplomacy.