The recent election of Jair Bolsonaro could put an end to a long period of political uncertainty in Brazil, which has negatively impacted investor sentiment and growth scenarios in Latin America's largest economy. It remains to be seen whether the new executive will be able to implement the necessary reforms in the short term, finding itself operating in an extremely difficult context. Last May, a ten-day strike by truck drivers paralyzed the country, underlining the growing frustration with the political establishment and the high rate of corruption and crime. Investor confidence, a consequence of the market-friendly agenda launched under Temer's government, then began to waver, leading to a sharp (-25%) depreciation of the real. With the election of Jair Bolsonaro and his own choice of Paolo Guedes as Minister of Finance, atradius hopes for continuity of economic reforms, but challenges abound.
On the political front, the new administration faces a deeply fragmented and less experienced Congress. In this context, there will be 30 parties in the Chamber and 21 in the Senate: right-wing and centre-right parties have a joint majority in the chamber of 60%, just enough for the three-fifths needed for constitutional amendments. But not all deputies will be aligned on all of Bolsonaro's political proposals, also due to pervasive interests. Furthermore, analysts point the finger at the controversies linked to the very figure of the honorable Bolsonaro and on what the consequences deriving from the electoral slogans regarding human rights and civil liberties could be. Whether it will be able to build and manage coalitions of governments to pass necessary reforms, especially those that require constitutional majorities, is therefore an open question.
On the economic front, the main challenges come from the need to restore public finances to a sustainable level, thereby increasing GDP growth rates and keeping inflation in check. Brazil's deficit remains high (7,5% of GDP in August, an increase of 0,3% compared to the same period of 2017), bringing the public debt ratio to 77%. Hence the most urgent fiscal measure will be the pension reform, which the Temer government has held on hold since the beginning of this year: spending currently amounts to a third of the federal budget before interest payments, estimated at 9% of GDP . And, since any pension reform requires a constitutional amendment (which requires three-fifths in both houses of Congress to pass), if it is not implemented quickly as planned, a set public spending ceiling will be exceeded. in 2016 and the debt-to-GDP ratio will continue to increase. In the absence of these reforms, inflationary pressures will also return to weigh, rising in recent months, reaching 4,5% in September, largely due to energy prices and the depreciation of the currency in view of the elections.
Analysts then expect the GDP to rise slowly, with growth of 1,1% in 2018 and 2,3% over the next year. Recent indicators suggest that the economy is slowly recovering thanks to the improvement in the business climate and private consumption. However, this recovery will remain weak, since unemployment persists at 12% and exports decrease due to the economic problems in neighboring Argentina, for green-gold exports. And the fragility of public finances leaves no room for error: if the new government fails to implement the pension reform and other necessary fiscal measures in the first year, the outlook will deteriorate rapidly. The window of opportunity is very narrow given the high unpopularity of these measures and the volatility of investor confidence: the risk is to sour the outlook for investors, depreciate the real and increase the current low interest rates, all at detriment of economic growth.
Nonetheless, the shock-absorbing capacity of the Brazilian economy remains strong, supported by a flexible exchange rate, a robust banking sector and very high official reserves. Not surprisingly currently Brazil is the first destination market for Italian exports in South America and ranks thirty-first in the general ranking. After the period of decline experienced in recent years, exports from the Bel Paese are expected to grow at a rate of 4% over the next three years to reach 3,5 billion euros by 2020. In this context, Italy mainly exports mechanical instrumental (32%), chemistry (15%), means of transport (12%), electrical appliances (9%), rubber and plastic (6%), metals (5%); the various sectors of opportunity include agriculture, automotive, construction, mining and infrastructure.
