Paulo Guedes hopes for fiscal reform and privatization proposals in 2020

On July 5th, Paulo Guedes, ministry of economy in Brazil, gave an interview to CNN Brazil and spoke about his expectation on fiscal reform and privatization proposals still in 2020. He explained that fiscal reform was a priority to the current administration, but the crisis of covid-19 redirected attention to solving issues of population’s health, employment and income. To him, current crisis projections of 10% PIB reduction of need to be reconsidered to a 6% fall, since the country’s exports were kept within good performance throughout the crisis.

Regarding fiscal reform, Guedes explained that a broad proposal will be presented to congress still in 2020. His intention is to broaden the bases of tax incidence with lower tariffs, easening the burden on labour taxation and, consequently on businesses. One of his proposals is to create an IVA tax (tax over aggregated value), and taxing digital services, but congress has not engaged in this digital taxation debate.

Guedes expects to advance on privatization projects in the sectors of electricity, water & sanitation, oil & gas, and coastal navigation. He looks at the subsidiaries of the state bank Caixa for a large IPO proposal. The expectation is that the privatization program also includes companies such as Eletrobras, Correios, EPL, Valec, EBN and Infraero.

However, according to the political analyst Thiago de Aragao, foreign investors do not expect Guedes’ privatization program to take off as quickly as expected by the minister, despite his good will and intentions. This common delay seen in the brazilian market is due to the complex institutional arrangement in the country, seen somewhat as a form of mechanism in place to validade and balance interests.

Ultimately, the positions of delegates in the national congress need to be assessed to further understand the likelihood of some of these privatizations. Whereas articulations for privatization of Eletrobras seem to be very unclear in congress, the recent approval of the sanitation law (PL 4.162/2019, waiting for sanctioning) opens up to new opportunities.

References

Estadao. O que o mercado precisa saber sobre as ultimas declaracoes de Paulo Guedes. Published on July 06 2020 by Isaac de Oliveira. Available at: https://einvestidor.estadao.com.br/mercado/ultimas-declaracoes-paulo-guedes/. Access on: July 11 2020.

Estadao. Investidor estrangeiro ve como irreal promessa de Guedes de 4 privatizacoes em 90 dias. Published on July 09 2020 by Thiago de Aragao. Available at: https://einvestidor.estadao.com.br/coluna/thiago-de-aragao/guedes-privatizacoes-investidor-estrangeiro/. Access on: July 11 2020.

Senado. Novo marco legal do saneamento basico aguarda sancao presidencial. Published on June 26 2020. Available at: https://www12.senado.leg.br/noticias/videos/2020/06/novo-marco-legal-do-saneamento-basico-aguarda-sancao-presidencial. Acces on: July 11 2020.

2019 Economic Outlook Brazil: Infrastructure and Reforms

On February 4th, the Brazilian President Jair Bolsonaro delivered the yearly Message to National Congress, in its opening ceremony for the 2019 legislative year. This article is based solely on the official document, which is divided in five main chapters: Economy, Infrastructure, Society, Strategic Issues, and Public Administration. It covers highlights related to macroeconomic reforms and infrastructure. And a second post containing highlights related to Strategic Issues and Foreign Policy will follow.

Economic Overview

  • The country ended 2018 with a deficit of USD 14 bi for 12 months (0,7% of GDP).
  • Exports were impacted by the economic crisis in Argentina. However, soy exports to China increased in the second semester due to restrictions derived from US-China trade tensions.
  • The report states that the country faces low external vulnerability as a result of its international reserve volume (USD 380 bi) and the flow of its direct foreign investment.
  • Labour market still experiences high rates of unemployment, but shows slow recovery.
  • Macroeconomic reforms are proposed for social security, fiscal system, public administration, foreign trade liberalization, privatization, and the autonomy of Central Bank.

Fiscal Reform

Brasil faces two major problems in its fiscal system. First is the high tax rates, which can reach 33% of GDP. This is above the other emerging economies and other Latin American countries, which average 20% of GDP). Secondly, its tax system is highly complex. This demands high resources from both private and public sectors, and generates high levels of litigation disputes due to uncertainties. Current fiscal reform proposals are limited to measures that seek to simplify enforcement, reduce tax cost liability and reduce the cumulative effects of some federal taxes. The message also states the continuity of the New Fiscal Regime (or, NRF – Novo Regime Fiscal), introduced by the Constitutional Amendment No. 95, of December 15, 2016, which is relevant for the fiscal rebalancing of the Federal Government. This regime, also called the “spending ceiling” (teto de gastos), established a limit for federal primary expenditure.

Social Security Reform

Payment of Social Security benefits has been the main factor responsible for the increase in total public spending in the last 20 years. In addition, the growth of pension transfers tends to accelerate due to the rapid demographic transition that the country is experiencing. The fertility rate fell considerably between 1980 and 2015, from 4.1 to 1.7 children per woman, which implies lower population growth in the future.

Infrastructure

One of the main problems is the lack of intermodal infrastructure allowing for connections between the national network of seaports to other modes of transportation (road, rail and river). It is necessary to reduce costs by improving port efficiency, which implies integration with the railway and road networks, linking the main regions of the country. It is also imperative to reduce costs and deadlines for boarding and disembarking. The goal is to reach performance levels of ports in countries such as South Korea (Busan port), Japan (Yokohama port) and Taiwan (Kaohsiung port).

The Government plans to launch dredging and land infrastructure projects, as well as completing other projects that will increase its seaport infrastructure capacity by 11.25 million tons /year, 4.11 million tons m³ /year, 250 thousand TEU /year, 13 thousand passengers /year and 50 thousand vehicles /year. The immediate goal is to auction ten port terminals in order to expand current capacity.

In 2018, a bidding announcement was issued for the 30-year concession of 12 airports in the Northeast, Southeast and Mid-Western regions. For the next years, it is projected the continuity of the airport concessions through the release of other bidding blocks.

Its road network, has not received the volume of investments needed for keeping up with the economic activity. Recent surveys indicate that only 38% of the segments are classified as being of good or better conditions. The government estimates USD 7,08 bi in investments for the next 5 planned concessions, which will comprise around 5,000 km of highways.

Source: Mensagem ao Congresso Nacional 2019