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Jun 7, 2018 | 04:00 GMT

7 mins read

Brazil Loses Its Appetite for Economic Reforms

A demonstrator holding a
(NELSON ALMEIDA/AFP/Getty Images)
Highlights
  • Protests and strikes against President Michel Temer's administration, which have exposed the political consequences of Temer's economic liberalization reforms, could continue if fuel prices remain high.
  • Right-wing candidate Jair Bolsonaro, who has been running on a "law and order" agenda, could benefit from the disorder caused by these protests and Temer's perceived inability to deal with them.
  • Social upheaval and the need to find a unity candidate ahead of the October general election will force Brazil's political establishment to slow the pace of economic and trade liberalization reforms in the next quarter.

Brazilian President Michel Temer was already deeply unpopular on the street, but now it seems even his congressional support for reforms is vanishing. Rising global oil prices and resultant fuel price increases have created social upheaval across Brazil in the last two weeks as strikes by truck drivers and oil workers have cornered the government ahead of general elections in October, exposing the discontent with the government's economic liberalization measures. With problems on the street and on the campaign trail, the pace of economic liberalization in Brazil might soon slow to a crawl as Temer's erstwhile backers in Congress spend more time considering the upcoming polls than fulfilling the president's agenda.

The Big Picture

In preparation for Stratfor's upcoming 2018 Third-Quarter Forecast, we are releasing a series of supporting analyses, focusing on critical topics, regions and sectors. These assessments have been designed specifically to contextualize and augment the quarterly global forecast.

 

Rising oil prices are set to produce more social discontent in Brazil. As the country prepares to hold general elections in October, prices at the pump have ignited nationwide protests and strikes. Social upheaval before the October general election will force Brazil’s political establishment to slow the pace of economic and trade liberalization reforms in the next quarter.

A Farewell to Subsidies

For years, the administration of former President Dilma Rousseff controlled the price of fuel in Brazil and maintained regulatory restrictions on foreign oil companies wishing to develop Brazil’s vast pre-salt oil reserves. In managing the price of fuel, Rousseff's government sought to tame the inflation produced by high oil prices with an eye to avoiding the social tensions that accompany such rises. Although the policy was popular with consumers, it came at the financial expense of the country's state oil company, Petroleo Brasileiro (Petrobras).

Brazil does not produce all of the fuel it consumes, meaning it must resort to imports to meet some of its demand (in the last four years, the import totals have varied from 20 percent to 40 percent). In 2012 and 2013, however, Petrobras was forced to import oil at a high price before selling it at a subsidized rate on the domestic market as per the stipulations of the price control policy. In all, the regulations caused Petrobras to lose more than $20 billion from 2012 to 2014 alone — a period that coincided with it becoming the world's most indebted company. Factors other than the price control policy, such as low oil prices from 2014 to 2017 and a devastating corruption probe involving Petrobras, also hurt the firm, resulting in company deficits for four consecutive years.

When Temer replaced the impeached Rousseff in May 2016, one of his first orders of business was to reverse some of her energy policies. Temer lifted fuel price controls and passed an energy reform bill aimed at eliminating restrictions on foreign oil companies in the development of Brazil’s pre-salt oil fields. In the meantime, Petrobras also accelerated the pace of its divestment policy after Temer's arrival by selling assets in Brazil and abroad. The changes have finally righted Petrobras' ship, which began reporting profits again this year.

Good for Petrobras, Bad for the People?

Temer removed the price controls at a time when oil prices were much lower. The decision naturally pleased Petrobras' investors, although it also elicited little discontent among the populace — largely because the low international oil prices did not produce any sharp hikes in the newly deregulated domestic prices. But as global oil prices, together with the U.S. dollar, started to rise significantly, so did fuel prices in Brazil, to the extent that the price of diesel in Brazil has jumped more than 50 percent in the past year.

Truck drivers have spearheaded opposition to Temer's fuel policy. On May 21, all 11 major truck drivers' associations and unions in Brazil went on strike to demand a reduction in fuel prices, especially on diesel. The strike paralyzed the country for a week, resulting in shortages for basic products in most of Brazil’s major cities.

Faced with this short but intense social unrest, the government made some concessions to truck drivers in an effort to restore normality. As part of the deal to end the strike, the government agreed to reduce the price of diesel by 10 percent and lower some taxes on fuel, although such a decision could add over $3 billion a year to Brazil’s fiscal deficit. Temer has even left the door open to a return price controls on fuel. In addition, Petrobras’ CEO, Pedro Parente, resigned as truck drivers and oil workers blamed him partly for the fuel policy that ties local fuel prices to international ones.

The Man Challenging the Establishment

The truck drivers' strike is a symptom of discontent not only with the government’s fuel price policies, but also with the country’s traditional political parties, particularly after a widespread corruption probe put several politicians and businesspeople in jail. (Unsurprisingly, some truck drivers’ associations even admitted that their ultimate goal was to oust Temer from power.)

This anti-establishment sentiment is growing, just four months before Brazil goes to the polls for general elections. Candidates who have poured scorn on entrenched political parties during their campaign, such as right-wing lawmaker Jair Bolsonaro, have tried to capitalize on the truck drivers' strike by criticizing the government's current fuel policies, even though Bolsonaro has previously spoken in favor of economic and trade liberalization reforms — and even toyed with the idea of privatizing Petrobras. And as a tough, law-and-order candidate, Bolsonaro could benefit from this type of social upheaval. In fact, most polling suggests that Bolsonaro is the frontrunner for the presidency, albeit with just 15 percent of the total vote.

But anti-establishment candidates are not the only ones who have been surfing on the unpopularity of Temer’s administration. The presidential candidate of the center-left Democratic Labor Party, Ciro Gomes, has been highly critical of the current administration, but for different reasons. Gomes, who is currently running in third place, believes the course of Brazil's economy must change. Instead of moving toward greater economic liberalization, the government should intervene in strategic sectors such as oil, natural gas and electricity, according to Gomes. Additionally, Gomes has asserted that the best way to tackle Brazil’s fiscal deficit is to increase taxes on financial profits and transactions.

Circling the Wagons

As Brazil heads toward October's elections, the country will continue trade negotiations under the auspices of the Common Market of the South, but few breakthroughs are expected, apart from the finalization of talks with the European Union, which are already nearing completion. Elsewhere, however, the prospects of progress on reforms are low. In fact, even political parties that back Temer’s administration in Congress could cease the drive to pass economic reforms — including an unpopular pension reform that would help take the sting out of Brazil's annual deficit of over $50 billion — ahead of the October vote in favor of circling the wagons to counter anti-establishment candidates such as Bolsonaro.

Even parties that back Temer could cease the drive for economic reform ahead of the October vote in favor of circling the wagons to counter anti-establishment candidates like Bolsonaro.

At present, the four main traditional political parties that back Temer in Congress have failed to agree on a candidate for the presidency. The ruling Brazilian Democratic Movement party has announced the candidacy of former Finance Minister Henrique Meirelles, while the Brazilian Social Democracy Party will back former Sao Paulo Gov. Geraldo Alckmin. The Democrats are likely to nominate the speaker of the lower house, Rodrigo Maia, while the Republican Party of Brazil has announced Flavio Rocha as its candidate. Polls, however, have indicated that all four candidates essentially cater to the same electorate and that none is among the prime candidates for victory. Accordingly, these centrist parties that support continued economic and trade liberalization reforms are likely to direct their energies over the next quarter to agreeing on a common candidate — instead of actually pushing through reforms.

As Brazil’s political establishment turns its attention to the October general elections, many of Temer’s structural economic reforms will fall by the wayside, apart from some trade deals that are already nearing completion. The pace of economic reforms was already expected to slow down in the next quarter ahead of the elections, but rising oil prices just made this trend a lot more certain — to say nothing about the prospect for more social upheaval.

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