Temer’s fire-sale is aimed at survival

4 Sep 17

Brazil's large-scale privatisation of state assets may not be all that it seems. Gavin O'Toole, author of numerous books on the region, says although the sell-off has pleased the markets it's more to do with the country's president Michel Temer securing his position and could have unintended consequences. 

Michel Temer is a man in a hurry. 

That is because the clock is ticking for Brazil’s president to end his country’s worst fiscal crisis in a generation.

Not only is Brazil gearing up for what are likely to be the most bitterly fought elections in its short democratic history next year, prosecutors who have smelled blood in a crusade against corruption have Temer in their sights. 

So a sweeping fire-sale of state assets announced by his government last month can be seen as much as a political manoeuvre as a game-changing effort to reform this giant economy.

The R$44bn (£10.7bn) sell-off to raise revenue and boost investment has certainly pleased the markets.

Temer’s government plans to auction 57 assets and has also signalled the sale of a controlling stake in Eletrobras, Latin America’s biggest electricity generator.

But the move was neither unexpected – it was foreshadowed by Temer shortly after taking office in August 2016 following the impeachment of his predecessor Dilma Rousseff that he helped to plot – nor is it guaranteed to proceed smoothly, let alone succeed in easing the country’s fiscal headache.

In straightforward fiscal terms, the sell-off appears to be a no-brainer.

The objective is to raise revenue to bolster Temer’s stabilisation strategy in a country struggling to emerge from a two-year recession that, by the end of 2016, had wiped out 9% of GDP.

Since taking power, he has pursued tough austerity policies premised on a familiar toolbox of slashing public spending, wages and jobs, and overhauling pensions.

At another level, the sales also aim to boost investment in infrastructure, inject efficiency into public enterprises, and end a prevailing vision of state-directed development associated with previous Workers’ Party (PT) governments.

But there is no doubt that the latest announcement has one principal motive – Temer’s survival.

Grandstanding in this way is an effort by a beleaguered president lacking a popular mandate to move on from a corruption scandal that has drained all hope of support for his austerity measures.

In August, congress voted not to approve corruption charges against Temer – but Brazil’s attorney general could charge him again, and as elections loom, his congressional support could evaporate.

Despite praise abroad for his reformist zeal, Temer is deeply unpopular among ordinary Brazilians: his approval rating has plummeted to 5% – lower even than that of Rousseff.

His response to the threat of prosecution has been to recruit support in congress in questionable ways, unravelling lauded environmental protections to cement the backing of powerful lobbies.

Moreover, the privatisation agenda will have to race against the clock as Brazil’s economy continues to wobble.

While a tight budget law has frozen spending, the slump has sapped tax revenues and Temer’s government has already been forced to increase the deficit target.

Many economists warn against fire-sales of this kind to meet recurring expenditures, suggesting that this fiscal illusion can worsen public finances in the long-run.

While Temer can portray privatisation internationally as the determined act of responsible men in suits to roll back 15 years of reckless leftwing budgeting, there are deeper motives that go to the heart of the power struggle that engulfed Brazil in 2016 – when Rousseff denounced her impeachment not just as a coup d’état, but as a national existential crisis.

Rousseff accused Temer of seeking to privatize the oil discovered by Brazil in deep Atlantic waters.

Her predecessor Luis Inácio Lula da Silva also waded in, claiming Temer was aiming to create conditions for the privatization of oil giant Petrobras.

None of this will discomfort foreign investors. What matters to them is Temer’s record – and he has followed through on pledges to stabilise the economy.

Brazil certainly needs to reform its bloated state. But the great era of privatisations in Latin America now looks somewhat Jurassic.

Leaders in this region in the 1990s built global reputations and tickets to Davos for life on audacious sales catalogues of this kind.

Brazil hosted the largest privatisation in Latin American history with the $19bn (£14bn) sale of telecoms giant Telebrás.

But the process ran out of steam as the country confronted the social issues blighting its economy, and as the consequences of privatisation became clearer: gains in consumer access were balanced by job losses and rate hikes.

What the 1990s taught us was that ambitious privatisation programmes often represented political statements. Brazil today is no different – but now other factors raise the stakes.

Temer’s government can expect resistance. In 1998 the Telebrás sale caused riots in Rio – and today Brazilians are even more suspicious of their political leaders.

The left cast privatisation as the main motive of politicians serving the privileged elite behind Rousseff’s impeachment.

Lula – who also denounced his conviction in July on corruption charges as a coup-like conspiracy to sabotage his chances in 2018 – has also attacked Temer’s privatisation agenda.

Temer lacks a popular mandate and has signalled clumsily that he will not be standing in next year’s poll, stoking grievances that he has little to lose from hurting ordinary Brazilians.

Moreover, even market optimism may be premature. The proposed sell-offs are complex and will take time – a commodity that Temer does not have. Meanwhile, economic observers mostly conclude that political tensions threaten Brazil’s recovery.

A constitutional lawyer, likened in the press to a butler, Temer is most comfortable in smoke-filled rooms as an agile choreographer of coalition politics.

Political uncertainty will not stop him from pushing forward his reforms – but in Latin America popular unrest has a nasty habit of unseating incumbents.

A defining characteristic of Temer’s austerity strategy so far has been that not everyone is required to make equal sacrifices: business lobbies have kept tax rises off the agenda.

It is this sense that “We are not all in this together” that will probably determine the fate of this Brazilian Machiavelli as his fingers pluck at the strings of power while his opponents use theirs to take the pulse of the streets.

  • Gavin O'Toole, expert on Latin America
    Gavin O'Toole

    A freelance journalist. He has written six books about Latin America and taught the politics of the region at Queen Mary, University of London.

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