Brazil Embarks on Major Privatization Plan

Brazil Embarks on Major Privatization Plan

The budget deficit of the government of Brazil is expected to be slightly lower than 8% of GDP this year. That is an improvement on last year’s figure of 9% of GDP, but is still well higher than any figure that could be considered sustainable and more than double the deficit levels expected to be recorded by other South American nations such as Chile and Colombia this year. Several years of deficits have started to add up now as well. Brazil’s accumulated public debt is now 78% of GDP, compared to 54% in Argentina, 48% in Mexico and Colombia, and 21% in Chile.

Brazilians have acutely felt the pinch. The unemployment rate has moved from close to 4% less than three years ago to 13% today and high levels of inflation have prevented a greater monetary response from the central bank. GDP is expected to grow again this year, by less than 1%, after contracting sharply in the previous two years.

The center-right government has a solution to the malaise, which markets will look favorably upon: privatization. More than fifty government assets are due to be sold or placed under private management. Among them are $19 billion electric utility Electrobras, which is 52% owned by the state, as well as a dozen airports. So far, oil company Petrobras and publicly owned banks are not expected to be included, though.

The last time Brazil had a privatization plan that was this large was when Fernando Henrique Cardoso was president between 1995 and 2003. Cardoso presided over the selling of government assets such as Telebras and Vale, the enormous iron ore miner. At the time, the program set off an enormous debate between the broad group of “developmentalists” who believe the best path forward is to maintain significant state influence in business and “neoliberals” who have advocated for great free market influence throughout Latin America. Economists continue to disagree on the ultimate merits of privatization, but studies have shown that the businesses privatized by Cardoso have outperformed public ones.

“The Temer package is undoubtedly the largest since Cardoso. It includes airports, sanitation systems, the electricity sector, issues that will contribute to changing the structure of the economy in the next two years, “explains Alexandre Galvão, a professor at the Don Cabral Business School.

Temer ascended to the presidency after Dilma Rousseff was impeached last year. He is now also living through an enormous corruption scandal of his own, with an approval rating now in the single digits and the plan is, in part, a reaction to those troubles.

This past May, tapes surfaced of phone calls between Temer and the businessman Josely Batista, who runs the meat packing company JBS, discussing numerous bribes offered to silence various entities. Testimony from executives at disgraced construction company Odebrecht has further tarnished Temer. The president was able to survive a vote in the legislature that would have allowed the Supreme Court to try him for allegedly accepting $5 million from JBS in return for political favors. He was only able to survive the vote, though, by promising funds and programs to members of the legislature. With public finances already stretched, a sell off of government assets is one of the few options available to the government to quickly raise funds.

“All the motivation of the program is the need to raise resources for the national treasure. Eletrobras was no longer playing a strategic role in the electricity sector, largely because of its financial problems, “says Nivalde de Castro, a specialist at the Institute of Economics at the Federal University of Rio de Janeiro.

In addition to the privatization plan, Temer will attempt to push pension reforms and austerity programs through the Brazilian legislature. Time will be of the essence in achieving results. Brazil will choose its next president in 2018.

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