This article has been updated.
To the attendees of the World Economic Forum:
This week in Davos, you will meet a man who seems destined to change Brazil for the better. Brilliant and disciplined, he has put together a truly first-rate team. In just three weeks in office, he seems to have correctly diagnosed what ails the world’s most disappointing large economy of recent years. There in the Swiss Alps, he will present his plan for fixing it; you will likely be dazzled.
This man’s name is Paulo Guedes.
Don’t forget, though: he is not the president.
That would be Jair Bolsonaro, who is off to a much rougher start. Since taking office Jan. 1, he has committed a series of gaffes and policy reversals on everything from tax cuts to an offer (quickly withdrawn) for the U.S. to build a military base on Brazilian soil. His family is suddenly enmeshed in a corruption scandal with unpredictable, potentially dire consequences. Bolsonaro and his allies seem more focused on attacking enemies imaginary or irrelevant – “cultural Marxism,” “gender ideology,” globalism and the press, among others – than offering viable solutions to Brazil’s real problems. The few policies he has put forward include a loosening of gun controls in a country that already has more gun deaths than any other, moves that may allow for faster deforestation of the Amazon, and a decree to “supervise, coordinate and monitor” international NGOs operating in Brazil.
Nonetheless, markets have soared, preferring to concentrate on the plans of Guedes, his powerful, University of Chicago-educated economy minister, to overhaul the pension system, shrink Brazil’s bloated state and restore a degree of sanity to its finances – which almost all analysts agree is the key to getting the economy growing again. “None of the other stuff matters to us,” a Wall Street fund manager recently told me.
The two related questions you and other investors should be asking this week is:
1. How much Guedes are we really likely to get?
2. How much does the “other stuff” actually matter?
Well, it’s complicated.
On the one hand, Bolsonaro still seems content to delegate to Guedes on most issues regarding the economy, which he has famously – and repeatedly – said he doesn’t understand. His gaffes and reversals may be an inevitable learning curve for a president who spent the previous 28 years as a relatively obscure congressman, far from real power in Brasília. (Many in his Cabinet and party are political novices.) His early stumbles don’t appear to have significantly dampened the public’s optimism about his government, as Brazilians desperately hope he can fix the country after the brutal economic meltdown and endless scandals of the past four years. He still seems to possess enough political capital, in Congress and elsewhere, to get things done.
It must also be said: Bolsonaro deserves considerable credit for postponing surgery to withdraw a colostomy bag, which he’s used since surviving an assassination attempt last September, to be at Davos with Guedes and others from his Cabinet. It shows personal dedication to the need to “reestablish the world’s confidence in Brazil,” as he said upon arrival on Monday. (Editor’s note: After publication of this article, Bolsonaro’s speech at Davos on Tuesday was much shorter than originally scheduled, did not mention pension reform and offered few specifics. Several investors present expressed disappointment. One wrote me: “Never experienced anything like that with a president here. Really bizarre.”)
Making such a big effort to attend the world’s most famous gathering of globalists also suggests that at least some of the nationalist rhetoric coming from Foreign Minister Ernesto Araújo and others may ultimately be overruled, treated as red meat for the conservative base rather than actual policy. Actions speak louder than words.
But the concern is this:
Bolsonaro seems to believe in the “other stuff” more than he does in Guedes.
Yes, it matters. Bolsonaro has already differed with Guedes on critical points, from the retirement age targeted by the pension reform to whether the armed forces should also have their benefits cut. That’s his right, of course – he’s the president – but it confirms that what Guedes says at Davos or anywhere else cannot be taken as gospel. Meanwhile, words do have consequences: As Bolsonaro made numerous anti-China statements during the campaign, the Chinese took note – and their direct investment in Brazil fell a whopping 75 percent last year. China has been Brazil’s number-one trading partner for years; if Araújo gets his wish, Brazil will assume an even more antagonistic posture toward Beijing while allying itself with the United States and Israel (which has already soured relations with key Arab trading partners). That’s risky for an economy expected to grow just 2.5 percent this year.
Bolsonaro has long shown the greatest personal enthusiasm for fighting “communists” (i.e. leftists) and criminals; his conversion to orthodox economics is much more recent. In coming weeks, the president and his allies will introduce new legislation that would ease punishment for police who kill suspected criminals, lower the age of criminal responsibility from 18 to 16, and so on. These policies are doubly risky – they will generate noise in Congress, and nothing in recent Latin American experience suggests they will actually reduce crime. A recent Datafolha poll showed most Brazilians disagree with key points of Bolsonaro’s agenda, from privatizations (60 percent against) to reducing environmental protections (59 percent against) to giving preference to the United States in foreign relations (66 percent). Governing is about priorities; if he pursues these points with greater zeal, it will dilute attention for fixing the economy.
Finally, there are the corruption allegations involving Bolsonaro’s son Flavio, who was elected senator in October. Flavio Bolsonaro has denied wrongdoing, but his decision to ask the Supreme Court to shelve or at least delay the investigation suggests desperation, and his explanations for what happened have so far not been credible. The case has already badly damaged the Bolsonaro family’s most valuable asset – its reputation for not being corrupt – and prompted angry recriminations even from some of their supporters. If the scandal spreads to other family members, the damage could be much, much worse. As is, some analysts believe the allegations will lead President Bolsonaro to be more reliant upon the military, which has corporatist instincts and no love for Chicago-style reforms.
In sum: Enjoy your time in the mountains. Listen carefully to what Bolsonaro and Guedes say. But the real test will come in February, when Congress is back in session. That’s when you should have a look at the newspapers and wires. If the headlines are mostly about retirement ages and “transition periods,” then Brazil’s economy may indeed be on its way back. But if they’re dominated by “terrorists,” shootouts, boys needing to wear blue, or family scandals… then you may want to wait until next year’s Davos to take another look. At the least.
This article was updated to reflect Bolsonaro’s speech at Davos.