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Analysis

Temer clutching at privatisation

Lula's return pits populism against pragmatism

by David Smith in Buenos Aires

Fri 8 Sep 2017

Michel Temer, Brazil's hard-pressed president with approval ratings around 5%-6% and just a year left in office, is taking drastic action to achieve policy success. Witness his latest gambit: the privatisation of state assets, everything from Latin America's largest electricity company to the national mint, highways and the ports.

The goal is to raise an estimated $14bn to ease the government's immense public deficit, which last year amounted to $180bn, or more than 9% of Brazil's GDP. The absolute figure from the world's ninth largest economy trails only the US and China.

In stark contrast to popular opinion, Brazil's financial markets have applauded Temer; the real is strengthening and the Bovespa equity index is rising. Astoundingly, despite political tumult the Brazilian stock market has been a global leader in the year since Temer took office, climbing by 50%.

'You can see privatisation as an act of desperation, or the boldness of a leader who has nothing to lose,' said one São Paulo banker, an ally of the president. 'Temer believes strongly in leaving his mark as president – and that means cutting back the vast state machine.'

There is no shortage of assets to sell. Electrobras, the largest electricity company in Latin America, is for sale. So too is Congonhas, São Paulo's city airport. The same is true for a catalogue of highways, oilfields, ports and energy transmission lines.

Temer's supporters point to the success stories of past privatisation programmes, specifically under like-minded President Fernando Henrique Cardoso in the 1990s. They like to remind people of Embraer, Brazil's flagship aerospace company, privatised in 1994; today it is the world's third largest aircraft manufacturer.

Opponents respond with the case of Oi. The telecommunications giant, privatised in 1998, last year filed for bankruptcy protection worth $19bn. And there is semi-public Petrobras, the oil behemoth which has bedeviled Brazil in recent years with a corruption scandal that reaches the top of Brazil's political class.

Announcing a privatisation programme is one thing; making it happen another. Electrobras' major assets, for instance, will be excluded from any sale. These include the Itaipu dam, which last year produced the most energy of any hydroelectric facility in the world and is co-owned with Paraguay.

'What matters, however, is the direction Temer is charting for our country,' says one of the president's advisers. 'Electrobras has been absorbing billions of government money, money that can go to health, education, sanitation.'

Leading economists are not so sure. 'Privatisation is positive, the intention is good, but there's no strategic plan here,' according to one analyst in Rio de Janiero. 'They are pushing this through in a rush to try to kickstart their reform package, stalled by all the scandals.'

The rest of the region is watching closely, not least since elections are just a year away, and because one of Latin America's iconic populists is making a reappearance: Luiz Inácio Lula da Silva, president of Brazil between 2003-11. He has taken to the campaign trail in recent weeks, seemingly not put off by the almost 10 years of jail-time to which he's been sentenced for corruption and money laundering. The conviction, stemming from the Petrobras scandal, may yet bar him from running, though he is appealing the decision.

Lula advocates a return to the big government programmes which typified his leadership. He is promising government intervention at almost every level. 'What will make us great again is putting money in the pockets of the people at the bottom, not the rich,' he's been telling crowds in the impoverished north-east of Brazil.

Temer's adviser concludes: 'What's at stake here is a battle that stretches from Mexico to Argentina. Populism v. pragmatism. Populism v. economic reality.'

David Smith is a Member of the OMFIF Advisory Board and represented the United Nations Secretary-General in the Americas between 2004-14.

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