Virus Fallout and Gummed-Up Congress Pressure Bolsonaro

(Bloomberg) -- Brazil's polemic president capped off his first year in office falling short on promises to crank up growth in Latin America's largest economy. The big question now as global headwinds intensify is whether he missed his window.

Jair Bolsonaro faces no shortage of challenges in his sophomore year, from external drags like China's slowing economy and the coronavirus to local obstacles including double-digit unemployment and municipal elections that'll gum up efforts to pass more reforms. Analysts in a weekly central bank survey have slashed forecasts for 2020 growth recently to about 2.17%; Goldman Sachs and BNP Paribas say even that looks far too rosy.

Brazil's economic growth slid to 1.1% last year from 1.3% in 2018, according a government release on Wednesday. The data may serve as reckoning of sorts for a contentious leader who swept to power promising a break from years of economic mismanagement and disappointment -- and whose popularity is still running relatively strong. Lofty plans to jolt growth by selling off state assets, slashing red tape and gutting spending energized investors but largely failed to materialize.

BRAZIL REACT: Investment Contraction Sours Moderate GDP Growth

“We never bought into the optimism for last year,” said BNP chief economist Gustavo Arruda. “And now with the coronavirus, we're even more pessimistic.”

The presidency's press office declined to comment on this story when contacted by phone and email.

There's no doubt that 2019 threw some curveballs Bolsonaro's way -- the deadly dam disaster that scuttled output at a top Brazilian exporter, for example, and the crisis in neighboring Argentina. But with 2020 looking increasingly gloomy, the Brazilian president may find the landscape even more difficult to navigate as he tries to push through promised reforms that would simplify tax laws and revamp generous pay and benefit packages for public servants.

While Bolsonaro and Economy Minister Paulo Guedes have acknowledged the challenges going forward, their ability now to respond to unexpected shocks with traditional tools is limited. Rising public debt and forecasts for a decade of budget deficits severely hamper any chance of fiscal stimulus, and the central bank has already cut the benchmark Selic interest rate to a record 4.25%.

Read more: Stronger Budget Result in 2019 Masks Brazil's Harsh Debt Reality

The coronavirus crisis and other global headwinds touch on just about every one of Brazil's key pain points: commodity prices are tumbling, the currency is weakening, investors are fleeing risk and export demand is under threat.

The real touched a record low on Tuesday and is the world's worst-performing major currency this year, which threatens to fan inflation. A gauge of commodity returns last week hit the lowest level since 1987, a heavy blow in a nation that leans on its agriculture, oil and mining sectors. Meanwhile, China and the European Union, among Brazil's top export destinations, are facing slowdowns or even recession, and overall global growth is poised for its weakest performance since the 2008 financial crisis.

Brazil's central bank, in a statement late Tuesday, opened the door to more interest rate cuts, signaling that the outbreak of the new coronavirus creates a bigger risk to the economy than of a spike in inflation.

“Compared with other countries, Brazil doesn't have any room to provide government stimulus to the economy, but we still have room to cut rates,” BNP's Arruda said. “It is the only stimulus that could be done responsibly.”

Against that backdrop, Bolsonaro's chances of handing investors a breakout 2020 are dimming. That could hurt a personal approval rating that rose more than 6 percentage points to 47.8% in a January poll, which cited a perception among voters that he could pull off a turnaround.

Sluggish growth after a crippling two-year recession that ended in 2017 mean Brazil's economy already isn't on its best footing to face this year's challenges. Locally, while Bolsonaro did notch some wins in his first year, including his flagship pension reform that saves about 800 billion reais ($177 billion) over a decade, his contentious governing style has fostered tensions with Congress that may complicate efforts to pass new reforms.

Since his election campaign, Bolsonaro has broken with Brazil's tradition of offering ministerial posts to allied lawmakers to form a working majority in a Congress that has more than 30 parties. Prospects of warmer ties were scuttled earlier this year when Guedes compared public servants to parasites and Bolsonaro endorsed protests against congressional leaders this month.

He'll need lawmakers' backing for his tax and public servant reforms, although -- to be fair -- he hasn't sent either bill to Congress yet. And with municipal elections set for October, the legislative branch is due for a slowdown in coming months as lawmakers fan out to stump for local candidates or run themselves and are hesitant to vote on issues that may make them unpopular.

“There seems to be no magical solution to boost growth in Brazil,” said Adriana Dupita, Latin America Economist for Bloomberg Economics. “Low rates can prop up growth only for so long, and there is no room for fiscal stimulus. The time has come for the country to face once and for all its structural challenges.”

--With assistance from Aline Oyamada and Fabiana Batista.

To contact the reporter on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Matthew Malinowski, Jessica Brice

©2020 Bloomberg L.P.