2009 will be Last Lap for Lula

RIO DE JANEIRO (Economist) January 20, 2009 — A freakishly popular president has only a year left before electioneering curtails his mandate. He will spend it reacting rather than reforming

Repeats are often disappointing. It is rare indeed to find a president in his second term with an approval rating of 80%, as Brazil’s Luiz Inácio Lula da Silva now enjoys. No American president since the second world war has managed it. In Latin America, only Colombia’s Álvaro Uribe at the height of his success last year against the FARC guerrillas has touched a similar level of adoration. So Lula, a pragmatic former trade-union leader, is entering his penultimate year in office in a position in which he ought to be able to do almost anything.

Yet this apparent omnipotence is illusory, not least because it will be brief: by early 2010 the president will start to be overshadowed by the campaign to elect his successor. He is also constrained by his own left-wing Workers’ Party (PT); by his political allies; by the economic troubles that only recently reached Brazil’s shores and have yet to be felt to their full extent; and by his temperamental compulsion to preserve his popularity. “I would not like to be called a populist,” he sometimes says, “but I do like to be popular.”

Lula still talks about reforming Brazil’s labyrinthine tax system and improving the way its political parties and elections work. These were supposed to have been the priorities of his second term. Both are properly matters for Congress, though if he wished the president could use his vast political capital to try to force them through.

Yet they are forever being postponed, sometimes on flimsy excuses. Tax reform was put off at the end of last year because of the gloomy economic outlook. In fact, that makes simplifying the tax code (which according to the World Bank takes a typical Brazilian company 2,600 hours a year to comply with) more important than ever. It will not be considered again until the end of February. As for political reform, this is more likely to be decided in the courts: Brazil’s elected officials are still waiting to see how much bite there is in a ruling by the Supreme Court that prohibits the common practice of switching parties straight after an election.

“People have been talking about these reforms since 1988 when Brazil’s constitution was approved,” says João Augusto de Castro Neves, a political consultant in Brasília. “It is like a badge of political seriousness to do so.” Instead of pursuing them, he reckons, Lula will be fully occupied just keeping his coalition government together. The Party of the Brazilian Democratic Movement, a ramshackle concoction of regional political barons that is the coalition’s biggest force, is trying to secure the presidencies of both houses of Congress, which are being contested at the moment. If it succeeds the party will apply its customary leg-irons to any attempts at reform. If not, its leaders will need placating, which will amount to the same thing.

Unlike Mr. Uribe in Colombia, Lula has made it clear that he will not seek to cling to office by changing the constitution to allow him to run for a third consecutive term. The idea was floated by leaders of the Workers’ Party, which worries about its fortunes once its talisman has gone. Commendably, Lula scotched it, leaving the PT searching for a viable successor. He has pushed the candidacy of Dilma Rousseff, his chief of staff. She is a competent political insider, but lacks mass appeal. But even if the centre-right opposition wins power, Lula knows that his social policies, centered on Bolsa Família, a cash-transfer scheme benefiting 11m poor families, are unlikely to be overturned.

Until the election most of Lula’s energies are likely to be taken up with crisis-management. According to IBOPE, a pollster, 74% of Brazilians expect this year to be better than last. They are likely to be disappointed: the economic data will get worse as the year progresses because the economy has only recently started to splutter after growing rapidly for the first nine months of 2008.

“Any preconceived political plans will have to be torn up to deal with this crisis,” says Raul Velloso, a consultant in Brasília who follows public finances. Mr. Velloso is worried about possible further weakness in the exchange rate (the real depreciated by 17% against the dollar in the last three months of 2008), and also by the ability of Brazilian companies to roll over their debt.

Brazil’s scope for fiscal stimulus is limited. Chile’s government this week announced a $4 billion bundle of measures aimed at creating 100,000 jobs and helping poorer families. It can easily finance the resulting fiscal deficit forecast at 3% of GDP this year because it built up a war chest of public savings when prices for copper, its main export, were high.

But Brazil’s government, with a much bigger public debt, needs to preserve its primary fiscal surplus (ie, before interest payments) to retain the confidence of bondholders. Tax revenues will slow along with the economy. The government’s priority is to implement its expansionary “growth acceleration” program of public investment (better known as PAC from its initials in Portuguese) rather than adopt new measures, says Nelson Barbosa, a deputy minister of finance. Everything the government does this year will be presented as part of the PAC, says a civil servant in Lula’s office.

If inflation remains stubborn, preventing the Central Bank from cutting interest rates, the government will come under pressure, especially from the PT, to find other ways to boost growth. These could include guaranteeing credit to farmers and construction firms. In recent years, whenever the economy has started to wobble Brazil’s politicians have calmed markets by demonstrating their commitment to economic orthodoxy. Some commentators worry that this commitment may be flagging. But this year, with governments around the world intervening in markets, investors may even be reassured if Brazil does the same — up to a point.