For Brazil’s beleaguered economy, the best long-term investment may be spending political capital to ensure that the government keeps its purse strings tight — at least according to one expert.
That seems to be what’s happening now in South America’s largest economy, where a constitutional amendment that would cap spending at the previous year’s inflation rate for 20 years is wending its way through Congress. It needs to pass with a three-fifths majority in two remaining votes to become law before the year’s end.
The controversial measure is a signature reform of President Michel Temer, who replaced Dilma Rousseff after her impeachment over the misuse of government accounts in July. Opponents say it would hurt the poor and cut education and health spending in a country that has seen millions rise out of extreme poverty but still faces stark inequality.
Ms. Rousseff, who was never officially implicated in the much wider kickback scandal at state oil company Petrobras, was nonetheless infamous among economists for presiding over populist economic policies that endangered Brazil’s fiscal stability.
To Fernando de Holanda Barbosa Filho, Ms. Rousseff’s 2012 “new economic matrix,” a raft of ill-fated measures meant to boost growth, was evidence that the government hadn’t learned its lessons after the inflationary policies of the 1990s.
Dr. Filho, an economist at Fundação Getulio Vargas, a prominent university with campuses in Rio de Janeiro and Sao Paulo, said the law curbing spending is the on-ramp to the right growth track.
“This is just a first step to put the fiscal policy in the right place,” said Dr. Filho, a proponent of fiscal reform, during an annual Brazilian-American Chamber of Commerce Southeast forecasting event hosted Nov. 1 at the Federal Reserve Bank of Atlanta.
Mr. Temer, who served as vice president until Ms. Rousseff was removed from office, believes that the tough work of unwinding those measures is the way to revive Brazil’s once-soaring economy, which has suffered twin effects of a political crisis and plummeting commodities prices.
GDP is expected to contract by more than 3 percent this year as the country faces its worst recession in 120 years. “Operation Car Wash”, an anti-corruption drive around the Petrobras scandal, continues to net high-level legislators and prominent business leaders. State and city governments are also strapped for cash, and inflation is running higher than target levels.
The current climate of “political dominance,” where the economy is hanging on pronouncements from Congress, will soon give way to “fiscal dominance,” where Brazil faces the harsh reality of spending cuts. That would be new for a country that has grown accustomed to budget deficits that ballooned in recent years and now approach 10 percent of GDP.
“Finally this law might create the incentive for people to understand that money doesn’t come from heaven,” he said.
Reform might be an especially tough pill to swallow for those directly affected, including foreign-ministry workers who struck earlier this years they faced the prospect of a freeze on wages.
Teachers are among the other constituencies that will be hit, and for good reason, Dr. Filho said: Half of education expenditures, mandated by the constitution at 13 percentof the budget, whether the money is there or not, go toward funding pensions for retirees whose average age is about 50.
Tackling this, however, will be an uphill battle.
“Usually in Brazil if you have a privilege for yourself you call it a right, and usually rights are eternal in Brazil, so this is the toughest job that President Temer has on this front,” Dr. Filho said.
Just raising the minimum age to 62 or 65 would go a long way toward restoring fiscal health, he said.
“That would make me very happy,” Dr. Filho said.
All that said, consumer and business confidence are both up, but spending hasn’t yet recovered as both sides ride out the current political uncertainty.
“We are expecting the future to be bright but the current conditions are not that good yet,” Dr. Filho said.
Brazil’s new consul general in Atlanta, Ambassador Maria Stela Pompeu Brasil Frota, struck a confident tone in her introductory remarks, noting that there had been no mass exodus of foreign companies in Brazil despite the difficulties in the market of more than 200 million people.
“We are doing our homework, and I’m quite sure we are on the right path and Brazil will surely gain good marks,” Ms. Frota said.
For companies like Delta Air Lines Inc., a recovery in the world’s seventh largest economy would be big news.
With 100 million air passengers per year, Brazil is too big to ignore, and Delta has invested more than $150 million in GOL, a domestic airline, while integrating their services and scheduling. The airlines are working together on an app that would tell travelers when they should leave to get to the airport on time, suggesting new flights if they miss one.
Some 35 percent of Delta’s Brazilian passengers transfer from GOL flights to Delta’s international routes, said Nelson Mikovenyi, Delta’s international finance director for South America.
And though Brazil has 100 million passengers in total, it’s only 20 million people actually flying — many of them taking multiple trips. The rate of passengers per capita, 0.5 passengers for every one person, is much lower than developed markets like the U.S., and it’s even lower than Colombia’s 0.6.
“Brazil is not only big, but it’s under-penetrated,” Mr. Mikovenyi said.
Before the government in Brazil basically shut down, it was working on an Open Skies pact with the U.S. that would liberalize routes between the two countries, adding capacity and perhaps reducing prices. Delta flies to multiple Brazilian cities from U.S. gateways, including Rio de Janeiro and Sao Paulo flights from Atlanta.