Temer’s ambitious $14bn privatisation drive

A welcome proposal, but controlling debt faces numerous hurdles

President Michel Temur has a 5 per cent approval rating and Brazilians are often wary of privatisations © EPA

Michel Temer is the most unpopular president in the democratic history of Brazil. He presides over an economy only just coming out of its worst-ever recession. He also faces corruption allegations and could be impeached. Yet markets are unfazed.Since he came to office one year ago Mr Temer has followed through on pledges to stabilise the economy, and the stock market has risen by a half. An ambitious $14bn privatisation programme, including the sale of Electrobras, the utility, has now raised investor spirits further. Although such market-oriented reforms are welcome, the optimism that has greeted them is premature.Brazil certainly needs to reform its bloated state. It is often a hotbed of corruption and patronage. Even the national mint, now up for sale, has been implicated in scandals in the recent past. Privatisation can also lead to greater productivity. The prime exhibit is Embraer, which has flourished since privatisation to become the world’s third-largest commercial aircraft maker. Even so, there are reasons to be sceptical about this privatisation drive.The first is time. Mr Temer has little of it — presidential elections are in October next year — and many of the mooted sales are complex. Take Electrobras. The huge Itaipu dam, which generates more power that any plant in the world and is co-owned with Paraguay, would have to be stripped out of the process; so too Electrobras’s nuclear assets. Even with the best will in the world, privatising Electrobras will be a complex deal that takes time. The same is true for some of the other 57 assets for sale, which include highways, ports and airports.A second problem is the urgent fiscal motives for the privatisation push. A stringent budget law, passed by Mr Temer, has frozen spending in real terms for 20 years. That is well and good, in theory. It reinforces his pledge to bring national debt back under control. The problem lies in the practice. The recession has sapped tax revenues. Budget cuts that Mr Temer had planned, such as trimming generous state pensions, have also floundered. As a result, the budget deficit is now 9 per cent of gross domestic product. Privatisation proceeds would help plug this gap. But it is poor economics to use one-off asset sales to meet recurring expenses.A third problem is Mr Temer’s lack of popular support. He has a 5 per cent approval rating. Brazilians are often wary of privatisations. Petrobras’s stock market listing did not stop corruption, as the Lava Jato corruption probe showed. Nor do privatisations always lead to greater productivity: Oi, a privatised telecoms provider, is in bankruptcy proceedings, the biggest in Brazilian corporate history. Public scepticism about the privatisation drive, already milked by the opposition and opposed by unions, could further push Brazil in a populist direction in the elections. Nobody can tell for sure.Mr Temer and his economic team have made important progress in stabilising Brazil’s economy. His privatisation drive seems designed to show he means to carry that on, as he is sure to stress to investors on a visit to China next week. If it also boosts Brazil’s stock market so much the better, from Mr Temer’s perspective. In a virtuous circle, it strengthens his standing in the local business sector, thus expands his chances of political survival, and so increases the chance of more reforms.But the practical and political barriers are large. And while crises can often help push through difficult reforms, they can also sabotage them in unexpected ways. Grand announcements in Brazil like this one, however welcome, need be taken with a big spoonful of salt.

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