Brazil: VistaBrazil Janeiro/Fevereiro 2019

Last Updated: 27 February 2019
Article by Veirano E Advogados Associados
Most Read Contributor in Brazil, July 2019

It has not taken the new Brazilian government long to begin making its mark – or at least to talk about it.

The new administration is promising to eliminate the deficit through a series of bold measures such as reforming the pension system, awarding oil concessions, and privatizing state-owned companies. None of these is a new initiative and some, such as social security reform, have proven tough nuts to crack in the past.

Economy Minister Paulo Guedes indicated on 24 January that priority would be given to structural reforms to reduce public spending. The minister also said that about US$10 billion in subsidies would be eliminated at a later point, once the social security reform package has been approved.

Pensions currently consume some 50 percent of the budget, and President Jair Bolsonaro sent a message to Congress on 4 February in which he promised a sweeping new system.

Part of the plan is to establish an individual retirement savings account; a move intended to boost the private savings rate and improve growth.

Another measure being proposed to improve the efficiency of the system is to reduce the volume of disability pensions by implementing better professional rehabilitation programs to help workers get back to work. Currently less than 5 percent of those receiving disability pay are receiving rehabilitation treatment.

Globally, less than 10 percent of total pensions are granted under disability, but in Brazil the rate is 17–18 percent.

One of the most contentious issues is the minimum retirement age. Just three days into his term, the president had told reporters that his government would set the minimum retirement age at 62 for men and 57 for women: significantly lower than 65 and 62 proposed by the previous administration.

Talks reportedly then got under way with congressional leaders, state governors, and mayors on the idea of establishing a minimum of 65 for everyone, with the requirement to pay into the pension system for at least 20 years. That ambitious plan would certainly be welcomed by the markets as a key part of putting the country's fiscal house in order.

A draft of the reform was presented to the president for review on 14 February, and by the next day Bolsonaro, who favored the lower retirement ages, had reportedly capitulated to the 65/62 proposal, but with a longer transition period – 12 years.

The indecision and debate over the issue is a reflection of just how difficult it will be to get agreement on new legislation. A proposal is expected to be sent to Congress within the next one to two weeks, when the government must wrangle the reform through Congress. It may take the first half of the year just to pass the Chamber of Deputies, before making its way to the Senate.

Selling assets

At the same time, the government plans to privatize almost all of the 138 state-controlled companies in order to reduce expenditures and bring in revenue. Oil company Petrobras and federal banks Banco do Brasil and Caixa Econômica Federal will remain in government hands, but the goal is to sell off everything else, including all subsidiaries of these last three state companies.

The proposal envisions asset sales of at least US$20 billion this year alone, according to Reuters.

The government's privatization secretary, Salim Mattar, estimates that up to US$214 billion could ultimately be raised through the sale of state assets. He has also suggested that the investment arm of the Brazilian Development Bank (BNDES) might be closed after selling all its stakes in private companies. That could include shares in meatpacker JBS, power holding company Cemig, aircraft manufacturer Embraer, and Petrobras.

Infrastructure Minister Tarcísio Gomes de Freitas and Mining and Energy Minister Bento Albuquerque have also made bold statements about privatizing many national assets and offering concessions.

Freitas has announced public tenders for various airports, highways, railways, and port terminals. The minister also declared that he intends to privatize all airports that are currently managed by state company Infraero. Federal auctions scheduled for the first quarter of 2019 are expected to bring at least US$1.7 billion.

Albuquerque, meanwhile, has affirmed that the privatization of electric utilities company Eletrobras will go ahead. The intention is to sell additional shares on the market to raise capital. Two strategic subsidiaries, nuclear power generation unit Eletronuclear and the massive Itaipú Binacional hydroelectric plant, which straddles the Brazil–Paraguay border, will first be separated from the holding company.

Taking nuclear private?

Albuquerque also contends that private companies should not face any restrictions in the exploration of nuclear energy. He wants construction of the Angra 3 nuclear plant to resume with a new private partner under the Partnership for Investment Program (PPI).

The Brazilian Constitution stipulates that exploration, industrialization, and trade of nuclear minerals – and enrichment of the same – are under the monopoly of the state. Albuquerque would like the prohibition on private- sector involvement to be reconsidered, although he has described that as his personal opinion.

The minister is a staunch advocate of nuclear energy as a crucial part of the national energy grid. He would like to see private companies participate in small-scale nuclear enterprises and in the construction of small reactors for water desalinization.

Fighting crime

Meanwhile, Justice and Public Security Minister Sergio Moro has outlined his proposal for an anti-crime bill that amends the Criminal Code, the Criminal Execution Law, the Law of Heinous Crimes, and the Electoral Code, among other legislation. Brazil has the world's highest number of murders, and the new government has made combatting corruption and violence a major plank of its platform.

The bill is intended to combat violent crime and organized crime. It involves tougher sentencing especially for repeat offenders, whistle-blower protections, the entrenchment of plea bargains, and a clampdown on political corruption. It also proposes jailing those whose convictions are upheld on first appeal, ending what has been de facto impunity for the wealthy and well connected.

Moro's bill must of course be passed in Congress, however, and about 30 percent of its members are currently under criminal investigation.

The new government has outlined several proposals that resonate with the business community and the general public. Making them a reality will be the next hurdle.

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