After Brazil was rocked by market turbulence this week, President Jair Bolsonaro sought to ease tensions not with international investors or political opponents, but with his own finance minister.
“Paulo Guedes is a pillar of our government,” Bolsonaro said on Wednesday. The day before, at a public event, he offered similar praise to the minister, who remained unfathomable in the audience with his emotions hidden behind a Covid-19 mask.
Bolsonaro’s shock movement a week ago replace the state-controlled CEO of Petrobras The result of disagreements over fuel prices was widely seen in Brazil as a snub to Guedes, a free market economist who has long decried government interference in business.
Moreover, the move – which brought down the oil producer’s shares and caused the currency to slide – called into question the Brazilian president’s commitment to the liberal structural economic reforms that are Guedes’ hallmark.
“The Petrobras incident scared some investors, but I think a lot more of the read-across to policy making and other areas,” said Eduardo Figueiredo, head of Brazilian equities at Aberdeen Standard Investments.
Ahead of his reelection bid next year, some fear Bolsonaro will pursue a populist agenda that could undermine the country’s already strained public finances. Several reformist officials having already resigned from the government, including one in charge of privatizations, some wonder if Guedes will join them.
“Cabinet changes are expected in the coming months. Topping the list of potential releases is a pivotal time. . . Paulo Guedes, ”said Jimena Blanco, head of research for the Americas at Verisk Maplecroft, a risk consulting firm. “The departure of Guedes would threaten a definitive turn in economic policy into full-fledged populism.
The presence of Guedes, a former investment banker, on Bolsonaro’s presidential ticket for 2018 allayed concerns in the Brazilian business community about the former captain of the far-right army.
By taking over the financial portfolio, Guedes has pledged to push through major structural reforms to revive Latin America’s largest economy after years of sluggish growth.
Yet aside from a large retirement savings bill, he has so far fallen short of his goals. The promised tax reform, the overhaul of the administrative state and the privatization of several large state-controlled companies have yet to materialize.
“When Bolsonaro was a [presidential] candidate, the market has always imagined that Paulo Guedes would have a great influence on him, ”said Cristiano Oliveira, chief economist at Banco Fibra, a business lender. “And what we realize is that this influence is much less.”
Despite the slow progress and This week’s Petrobras controversy, those close to the Minister of Finance insist that he is there for the long term.
Guedes is committed “like never before,” an aide said, adding that the minister was fully focused on a key budget amendment that will be voted on in Congress next week and which aims to cut public sector spending.
“We will continue to work,” said another official from the finance ministry. “Paulo Guedes is leading our meetings and we had a big victory with Eletrobras,” he added, referring to a bill this week to privatize the state-controlled electricity supplier.
Guedes has not made any public comment on the Petrobras incident since Bolsonaro intervened, which followed a dispute with managing director Roberto Castello Branco over setting fuel prices in accordance with international tariffs. His office did not respond to questions from the Financial Times.
For some investors, the silence is disconcerting.
While the Covid-19 pandemic has led to inevitable delays in reform, analysts note that powerful figures in Brazilian politics do not share the finance minister’s zeal to roll back the state, especially the large contingent of military generals. The new chief Petrobras chosen by Bolsonaro is an army reserve general with no experience in oil and gas.
Bolsonaro himself had statist instincts in the past which many believe are coming to the fore again.
“There seems to be an imbalance between the economic team and the heart of government. It’s an administration that doesn’t have the political capital to implement unpopular changes, ”said Camila Abdelmalack, chief economist at Veedha Investimentos, an investment advisory firm.
For foreign investors, the question is whether Petrobras’ fury is the harbinger of a more interventionist government approach or whether Camp Guedes can steer Bolsonaro towards a more practical approach to business and greater budgetary rectitude.
Brazil’s debt level, over 90% of GDP, is higher than that of any large developing economy other than China.
A key test will be whether the government can pass the so-called constitutional tax amendment in the coming weeks, which would bring some relief to Brazil’s coffers by capping public sector spending. The government also intends to push for more substantial reforms.
Paulo Uebel, who worked under Guedes but left government last year, said his former boss would stay the course.
“I don’t think he wants to quit. I think he wants the structural reforms to be approved, ”he said. “His credibility is at stake, so he must[show]it was worth the time and energy invested.
Additional reporting by Carolina Pulice in São Paulo