Thursday, January 20, 2022

ECONOMY | 18-03-2020 15:08

Coronavirus reopens fiscal debate for Brazil and Latin America

Even if most Latin American countries have yet to manifest the full brunt of the pandemic, economic contagion is already at hand.

Argentina, Brazil, Ecuador, Guyana and Panama have buried their first fatal victims of Covid-19. Chile, Colombia, Uruguay and Venezuela all decreed pre-emptive partial lockdowns and banned large gatherings. Venezuela, short of medicine and its hospitals in shambles, is a sitting duck. And even if most Latin American countries have yet to manifest the full brunt of the pandemic, economic contagion is already at hand. From Chilean salmon to Colombian flowers, the region’s signature exports have taken a severe hit. Costa Rica, a prime tourist destination, has cancelled 8,000 nights of hotel reservations and 22 international events. Mexico’s benchmark Mexbol index tumbled 8.3 percent when it opened on March 17, a few days after posting its worst close since 2008.  

In Brazil, the region’s largest economy, equities and the currency have experienced record beatings. The São Paulo Stock Exchange threw circuit breakers four times last week alone to halt vertiginous sell-offs.

On top of last year’s lacklustre growth (1.1 percent), government economists were forced to slash this year’s economic outlook from 2.4 percent to 2.1 percent, a figure that could prove optimistic. Unless Brazil quickly enacts vigorous measures, it could tip back into recession.

Ideally, crises focus the minds of wonks and lawmakers. So it was with hyperinflation in the 1980s and early 1990s, which cleared the way for Brazil’s maverick economic stability plan and dozens of transformative constitutional reforms. Will politicians seize the opportunity in the gathering pandemic?

True, during the last boom-bust commodity cycle, a fumbling left-wing government made calamitous mistakes. Instead of building a cushion of savings during the fat years, it sprayed the market with easy money and soft loans to darling companies. The result was scant enterprise, a fiscal sinkhole and the worst recession since the 1930s. Aggravated by rampant graft, the economic rout cued a polarising conservative backlash that landed a right-wing culture warrior in office.

Fortunately, a consensus for salutary structural reforms also was gaining critical mass. An ordinarily listless ongress passed a spending cap in 2016, limiting government expenditures for 20 years. Last year, it voted to overhaul the loss-making pension system. Both measures were flawed and roiled social discourse, but without them, Brazil’s public spending was on course to collapse. 

Mitigate the miseries

Enter the global health emergency. Brazil must mitigate the miseries of the contagion and invest in contingencies without falling back into profligacy. The fierce debate over how to protect the economy amid the outbreak threatens to pitch Brazil back into last decade’s toxic quarrel over big state dirigisme versus fiscal fundamentalism. Yet this is a debate Latin America’s biggest nation facing a public health and economic calamity badly needs to have.

Brazil’s neighbours should take note. Crashing oil prices and the spreading outbreak plus a continued selloff of equities could force the region’s economy to “a complete halt,” shaving as much as 0.7 percent from Latin American gross domestic product in 2020, Oxford Economics recently estimated. What’s worse, swelling public debt and tumbling currencies leave governments with little fiscal ammunition to fight a downturn and compensate victims. Nonetheless, central banks across the region have begun to pump credit into the stalling markets.

Some analysts call for Brazil to scrap the austere fixes of the past few years in favor of emergency fiscal stimulus. By suspending or even revoking the government spending cap, the argument goes, Brazil could free up public revenues needed to expand badly strained public hospitals and health infrastructure. Brazil has insufficient intensive care facilities and 90 percent of the country’s 5,570 municipalities have none at all.

Gentler borrowing rates and contingency cash could help struggling small businesses and defray the risks of a crash for the 36 percent of workers who toil in the informal economy, have no sick pay and rely on the next gig to make ends meet. “Crises demand bold moves and putting aside conventional thinking, and the new contagion is a crisis without precedent,” said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics.

One recourse is the Brazilian development bank, BNDES, which announced it has up to 70 billion reais (US$15 billion) on tap for loans at below market rates. “Brazil may be the only Latin American country with the fiscal space to increase spending,” said de Bolle. “It’s not much, but it can be important in times of dire stress and help the country avoid falling into recession as the health crisis deepens.”

Yet fiscal hawks warn that the market bump will be short lived and the effects on government coffers, permanent. That combination would underwhelm investors in search of stability and condemn the country to another bout of official profligacy and subpar growth. The Institute of International Finance, a Washington-based financial industry lobby, recently concluded that Brazil had the least fiscal latitude among emerging markets to spend its way out of the coronavirus emergency.

“Say you raise public sector salaries. How are you going to lower them again?” said economist Armando Castelar, at the Getulio Vargas Foundation in Rio de Janeiro. Revoking the spending cap would take a constitutional amendment, requiring a supermajority of congress, he added. “Once you remove the cap, what are the chances of restoring it?”

More hospitable

A better course might be to make Brazil a more hospitable country for investment, which has fallen by 28 percent since 2014, Castelar noted. “Investors need more than lower interest rates and fiscal stimulus. They need assurance that they will recover the money they invested,” he said.

Brazil’s chronically underperforming economy is hardly reassuring. Productivity has been inching along at 0.7 percent a year since the mid-1990s. Half of per capita income gains during those years owed to an expanding labor force. Yet as the country greys, the working population will shrink and with it the vaunted demographic bonus. Going forward, Brazil will need to make every worker more efficient, a task bedeviled by “poor education, weak infrastructure, and a challenging business environment,” economist Otaviano Canuto of the Brookings Institution wrote in January. The World Bank ranks Brazil among the chronic global laggards in ease of doing business: 124th place out of 190 countries.

What’s more, lowering interest rates and giving tax breaks to select industries such as construction (already a beneficiary of Brazil’s historically low interest rates) won’t remove those obstacles. “There’s a refusal to recognise that under current conditions, and with little public investment, Brazil is condemned to grow by no more than one to two percent a year,” Adriana Dupita, of Bloomberg Economics, told me.

What Brazil could do without is the familiar syndrome of dithering and hubris at the top. Even as stocks and the currency tanked last week. Economy Minister Paulo Guedes said he was “absolutely tranquil” over prospects for recovery, claiming that Brazil has “the capacity and speed for take-off” even as the world’s slows. The best vaccine against contagion, he said, would be for lawmakers to deliver structural adjustments. He failed to mention that the government has yet to send congress its proposals for tax reform and overhauling the bloated federal administration.

Magical thinking

In lieu of proposals, Bolsonaro and his inner circle have served up conspiracy theories and magical thinking. In his recent US visit, Bolsonaro waved off media questions about coronavirus to claim the 2018 election was rigged. (He won the run-off by a landslide.) Even as neighbour after neighbour launched emergency plans and counselled citizens to avoid crowds, Bolsonaro preferred to channel Trump by dismissing the outbreak as “not such a big deal” and “more a fantasy spread by the media,” and exhorted his partisan claque to join nationwide pro-government demonstrations.

For a moment last week, Brasilia’s populist fever seemed to have broken. With blood on the trading floors and the number of afflicted Brazilians accelerating, federal authorities promised a series of emergency economic measures, starting with US$29 billion in cash and credit for the most vulnerable. In an admirable nod to global safety protocols, Bolsonaro went live on Facebook and even donned a surgical mask to advise his followers to postpone their protests until the contagion had passed. After one of his closest aides had been diagnosed with the coronavirus, Bolsonaro reportedly will undergo closer evaluation (his first test came back clean) this week.

Then, on Sunday, the home crowd hit the street anyway. Bolsonaro cheered them on by Twitter and fist-bumped his fans. What’s a pandemic when you have horde immunity?

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Mac Margolis

Mac Margolis

Mac Margolis is a Bloomberg Opinion columnist covering Latin and South America. He was a reporter for 'Newsweek' and is the author of 'The Last New World: The Conquest of the Amazon Frontier.'


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