The Brazilian real will hit five to the dollar only if the government really messes up. That was the assessment early in March of Paulo Guedes, the country’s finance minister and the man who, a year earlier, presented himself as an economic alchemist, ready to transform the fading fortunes of Latin America’s largest nation.
Unfortunately for the bombastic former investment banker, the real did exactly that. A week after his comments, the currency weakened through the five level and then softened further, at one point hitting a fresh record low of R$5.25 to the dollar intraday. At about 5.20, from just over 4 at the turn of the year, it remains among the worst performing currencies of 2020.
It was a slide well lubricated by the global oil price war and the impact of coronavirus, which has hammered most emerging markets and especially those dependent on commodities. But even before then, Brazil was in a rut. By February 26, the day the first Covid-19 case was confirmed in Brazil, the market was already down more than 8 per cent for the year, after a vintage 2019 during which the benchmark Bovespa index soared more than 30 per cent.
So what changed? For many investors, it was simple: Brazil had missed its window to push through economic reforms widely seen as crucial to restoring its lustre.
Following the October 2018 election victory of Jair Bolsonaro and his appointment of Mr Guedes, a liberal devotee of the Chicago school of economics, the stage was set for reforms that would cast off the shackles of bureaucracy and red tape that had compressed Brazilian growth for so long.
It was an ambitious agenda and one that started well. By the middle of last year, a landmark pension savings reform — years in the making — was in the bag. The nation had guided itself away from a looming fiscal cliff. Hopes were high and the momentum was behind the cabinet to push forward with the next stages, including a contentious reformulation of Brazil’s byzantine tax code and an administrative reform of the state.
But then progress ceased. Despite much discussion and deliberation, key reforms such as the tax overhaul were never formally presented to Congress. With the exception of a thrust towards central bank independence, which almost made it to a congressional vote before the virus hit, little else has been done since October. Now investors are thinking little more can be done.
Even before the virus outbreak, this was always going to be a difficult year. The legislative agenda is sandwiched into a gap between the Carnival holidays early in the year and a de facto recess from July when lawmakers take leave to build up local support ahead of municipal elections in October. It was a reality acknowledged by Mr Guedes when he said early in March that there were only “15 weeks left to change Brazil”. Now, with Congress fully occupied with coronavirus-related considerations, that window is closing.
Mr Bolsonaro has not helped matters either. Since the beginning of the year, the acerbic rightwing leader has skirmished ceaselessly with lawmakers on whom he depends to pass reform legislation. The logic, it seems, is that such quarrels boost his stature ahead of the local elections, which — if he dominates — will put him in pole position for presidential elections in 2022. But the economic rationale is less clear.
“These fights will hinder reforms for certain,” said Armando Castelar, a researcher at the Brazilian Institute of Economics. “These disputes with Congress replace the reform agenda with conflict. I think the chances of reforms this year are nil.”
The impact of all this has been the gradual sapping of confidence from the private sector, which once so vocally supported Mr Guedes and his boss. Economic growth last year came in just over 1 per cent as capital investment stalled, despite interest rates being cut to record lows.
Now the country faces a sharp recession as a result of the viral outbreak. Emergency spending will no doubt reinvigorate concerns about Brazil’s fiscal position — concerns Brasília thought it had put to bed, at least temporarily, with the pensions reform last year. With the fiscal deficit already at almost 6 per cent of GDP last year and government debt at 75 per cent of gross domestic product, the outlook remains precarious.
All of which raises questions about the future of the alchemist who has yet to conjure gold. Despite the real being firmly past the symbolic 5 to the dollar threshold, and the economy under threat, President Bolsonaro has expressed his “total support” for Mr Guedes — a sure sign the minister really ought to be worried.
The writer is the FT’s Brazil bureau chief
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