WITH bearded baristas and furniture cobbled together from wooden crates,
Curto Café in Rio de Janeiro is a typical outpost of Brazil’s nascent hipster
scene. Aficionados of its organic coffee do not pay set prices; instead they
pay what they think reasonable—or what they can afford. This, says Gabriel
Magalhães, one of Curto’s founders, is less and less. Like other Brazilians, cariocas
(as Rio residents are known) are pinching their pennies.
Brazil is suffering its worst recession since the 1930s, perhaps of all
time. On June 1st the government reported that GDP contracted by 0.3% in real
terms in the first quarter of this year; it is 5.4% smaller than it was a year
earlier (see chart). Over that period GDP per person dropped by more than it
did during the hyperinflationary “lost decade” from 1981 to 1992, notes Alberto
Ramos of Goldman Sachs, an investment bank. Over two years the number of
jobless Brazilians rose from 7m to 11m. It is a “downright depression”, says Mr
Ramos.
The task of pulling Brazil out of this morass falls to Michel Temer, who
took over as interim president after the Senate voted in May to try President
Dilma Rousseff on impeachment charges. Politically, his government has had a
rough start. Two of the ministers in his all-white, all-male cabinet, including
the one in charge of fighting corruption, had to step aside after recordings
were leaked in which they appeared to criticise prosecutors’ investigation of
the massive corruption scandal surrounding Petrobras, the state-controlled oil
company. They say they were misinterpreted.
Mr Temer’s economic programme is faring better. His heavyweight team, led
by Henrique Meirelles, a former governor of the Central Bank, has proposed the
most ambitious overhaul of Brazil’s economic governance in decades. Public
spending, including on the unaffordable pension system, is to be slashed,
though the government has yet to say just how. Enterprise-crushing regulations
are to be lifted, starting in the oil and gas sector. Mr Meirelles says the
government will consider reforming Mussolini-era labour laws and the Byzantine
tax code. Privatisation, long a taboo, is a possibility for the first time
since the 1990s. Such ideas are a radical break from the left-wing
interventionism practised by Ms Rousseff’s government, which is largely
responsible for the economic mess. They offer hope of a way out of it.
The centrepiece of Mr Temer’s plan is a constitutional amendment to freeze
public spending in real terms. Even health and education—which consume more
than a quarter of government revenue without providing commensurate
benefits—may not be spared. The government is expected to present a draft to
Congress within the next two weeks.
The idea is to cure the government of one of its principal vices. Public
spending has grown by an annual average of 6% for the past 20 years, much
faster than GDP. The central government’s primary fiscal balance (before
interest payments) went from a surplus of 2.2% of GDP in 2010 to a deficit of
2.3% in the year to April 2016, the highest level yet. This, and the prospect
of deficits stretching far into the future, keeps interest rates high, which
further worsens the deficit. The government’s interest bill is a massive 7% of
GDP. Brazil’s high taxes thus pay for past profligacy rather than effective
government.
The spending cap, if approved by majorities of three-fifths in both houses
of Congress, will lead to lower deficits as soon as growth and tax revenues
revive. It could help even sooner, says Arthur Carvalho of Morgan Stanley, an
investment bank. That is because confidence that Brazil will reduce its debt
could lower long-term interest rates, cutting the government’s interest bill.
As important, the spending cap will force the government to undertake other
reforms, though in the long run it may prove impossible to maintain as the
population grows. Currently, the constitution and other legislation protect 90%
of spending from cuts, no matter how unproductive it is. If the government is
not to breach its self-imposed ceiling, those laws will have to change.
Such prospects are already stirring hopes among unhappy entrepreneurs and
investors. Bond yields have fallen from about 17% in January to 13%; the cost
of insuring against default is down by a third since December. With more than a
third of industrial capacity idle, production could revive quickly if sentiment
improves. “In six months we may look back at today as an inflection point,”
says Marcelo Carvalho of BNP Paribas, a bank. But only if Mr Temer delivers
what he has promised.
That “will be tough”, admits Mr Meirelles, the finance minister. He hopes
to enact some reforms, including the spending cap, before next year’s budget is
submitted to Congress, which must happen by August 31st. With important local
elections looming in October, few politicians will be in the mood to vote for
less spending on schools and hospitals.
But members of Mr Temer’s team, several of whom left lucrative
private-sector jobs to help rescue the economy, dispute that. They think the
political and economic crisis has made both voters and congressmen more
receptive to proposals for radical change. A billboard put up by the National
Confederation of Industry at the airport in Brasília, the national capital,
demands: “Pension reform now!”
In theory, Mr Temer can count on 356 votes in the 513-seat lower house of
Congress, and 56 in the 81-seat Senate, more than enough to amend the
constitution. Unlike Ms Rousseff, who also enjoyed solid nominal majorities in
Congress, Mr Temer knows how to charm and cajole his allies. Unencumbered by
past commitments, he has more perks and patronage to offer politicians who
formerly supported Ms Rousseff.
Despite watching two ministers sink into the quicksand of the Petrobras
scandal, Mr Temer has managed to keep his government functioning. That may be
in part because Brazilians have low expectations. A handful of other members of
his cabinet are under investigation, as is Renan Calheiros, the president of
the Senate and a member of Mr Temer’s Party of the Brazilian Democratic
Movement, who features in the leaked recordings. But neither Congress nor the
voters are demanding the toppling of Mr Temer’s government. The howls of rage
from Ms Rousseff and her allies have so far had little effect.
A survey published this week by IMD, a business school, puts Brazil in last
place out of 61 countries in the efficiency of its government, behind war-torn
Ukraine and, astoundingly, bankrupt and autocratic Venezuela. Brazilians are
not expecting moral purity from Mr Temer’s interim government, which will
probably continue in office until after elections are held in 2018. But they
are hoping for relief from their economic pain. The early signs are that Mr
Temer knows how to provide it.
