Brazil has a window of opportunity. Will it use it?

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Michael Burak Tax, Partner, PwC US

I just came back from a 4 day trip to Brazil, where I had the pleasure of meeting with both foreign and Brazilian business leaders, analysts in PwC Brazil and in local think tanks, as well as a few government officials.

One issue is top of mind, I’ve found, for foreign investors in Brazil. It also frequently comes up in conversations with the Brazilian corporate leaders I’ve met through my work with them on investments in the US.

Will Brazil’s new government succeed in getting big ticket reforms through Congress? The priorities, the government has signaled, are pension reform to make government finances sustainable and measures to improve the ease of doing business.

I can’t mention names, but the overall mood was cautious optimism. Since so much of my work involves looking for risks, I admit that I am — from long habit — a little more on the cautious side, but there are real reasons for optimism.

Brazil economic opportunity

A new government, focused on a liberal economic agenda fueled by pension reform

An overburdened pension system is a problem we usually see in developed countries, with aging populations, not a developing country with a young population like Brazil.

But Brazil’s bloated pension system is deeply in the red. The federal system had a deficit of 2.9% of GDP last year. State and city pension systems have their own deficits too.

Without reforms, the situation may only get worse. The IMF estimates that Brazil’s pension expenditures, currently one of the highest in the world at 11.3% of GDP, is on a path to keep growing until it reaches to 26% of GDP in 2030.

That’s unsustainable, and the administration of recently-elected President Jair Bolsonaro knows it. His team is pulling out all the stops to get a reform through Congress — before the new president’s “honeymoon period” comes to an end.

Since Brazilian states and cities peg their pension payments to the federal governments, a federal reform will help state and local governments balance their books too.

Overall, the government’s economic team appears top notch, focused on liberalizing the economy — and the President seems to have their back.

Brazil wants to make life easier for business

At a time when so many countries are closing themselves off, Brazil’s government and business leaders are eager to open up.

I heard local leaders talk with enthusiasm about lowering tariffs, easing controls on capital flows and foreign exchange, and cutting red tape.

On taxes, the problem is not just the financial burden. It’s the complexity, the multiplicity of direct and indirect taxes and a lack of clear rules. Brazil needs a revolution of its corporate tax system, not just a reform. Many government officials understand that.

I’ve also been pleased to see Brazil’s new president place a special emphasis on trade and political relations with the US, including a visit, tentatively scheduled for late March. This emphasis is good news for the Brazilian companies I work with on US tax, technology, trade and other questions.

Brazil has the right resources in the right place

Brazil has long been a commodities powerhouse with a solid industrial base, but last decade the country found offshore oil reserves. Add to those reserves Brazil’s renewable energy resources, and the country could become a low-cost energy powerhouse.

That makes Brazil an excellent place to expand manufacturing, potentially making it the center of new regional supply chains.

A strong Brazil could strengthen all of South America. Many of the financial and business leaders I spoke to were excited about expanding their regional operations.

Two reasons for caution

Brazil’s potential is huge, but there are two big reasons why the watchword isn’t just optimism, but “cautious optimism.”

  1. The window may close. Pension reform is the key to making Brazil’s finances sustainable and bolstering investor confidence. But in Brazil, like everywhere else, pension reform requires unpopular benefit cuts. If the government does not get the reform passed quickly, while momentum is strong, it may never happen.
  2. We’ve been here before. I won’t claim to be a Brazil expert, but I have followed the country long enough to have heard other presidents enter office promising big reforms. But just like everywhere else, structural reforms are hard to implement.

So the question is, is this time different? Most of the leaders and analysts that I spoke to in Brazil think that it really might be — and a growing number of foreign companies think so too.

I’m not sure what the answer is, but Brazil certainly is one of the most exciting economies in the world to watch right now.

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Michael Burak

Tax, Partner, PwC US

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