When department store chain Havan opened in Brasília in November, customers were greeted with a curious site. Lying prone in the car park was a 35-metre-long replica of the Statue of Liberty.
Havan’s owner, Brazilian businessman Luciano Hang, has turned the statues into a group trademark — similar lady liberties hold their torches aloft over his stores in malls across Latin America’s largest country.
But in Brasília, the conservative entrepreneur who is a staunch supporter of Brazil’s president-elect, the far-right politician Jair Bolsonaro, was barred from erecting the statue because of local bylaws limiting the height of advertising.
The sort of red tape that grounded the replica was for Bolsonaro stalwarts a microcosm of the malaise that is afflicting Brazil. With his appointment of Brazilian investor Paulo Guedes, a PhD in economics from the University of Chicago, as economic minister, Mr Bolsonaro has pledged to end Brazil’s historic legacy of overbearing bureaucracy and usher in a more American style of capitalism when he assumes office on January 1.
“The Brazilian state is broken. So there is a historic opportunity to really move Brazil torwards a free market,” says Carlos Langoni, a former central bank president. Or as a supporter of Havan’s Mr Hang put it on Twitter, referring to the upcoming inauguration: “President Bolsonaro will ascend the ramp and the statue will rise as well.”
Yet for all the sound and fury of October’s bitterly fought presidential election, Mr Bolsonaro said little of substance during the campaign about what he intends to do on the economy.
Known for his disparaging remarks about women and gay and black people as well as his defence of torturers from Brazil’s former military dictatorship, the gruff former army captain used social media to exploit popular anger with a deep recession and corruption. Many voters saw him as the antidote to the leftist Workers’ party, or PT, whose founder and former president Luiz Inácio Lula da Silva was jailed for corruption earlier this year.
Mr Bolsonaro won over part of the business community with his one decisive act on economic policy — the choice of Mr Guedes, a tough-talking champion of liberal reform.
“This may be the first time we have a real chance of having capitalism in Brazil,” says Alfredo Valladão, a Brazilian political scientist at Sciences Po in Paris.
Supporters hope Brazil can re-emerge as one of the world’s most dynamic large economies, with some economists predicting it could grow faster in 2019 for the first time in six years than Mexico, Latin America’s other large economy, which is shifting left under new president Andrés Manuel López Obrador.
Balanced against these hopes, however, are questions over whether Mr Bolsonaro has the political skill to deliver such a transformation. His coarse rhetoric may please loyalists on the far-right, but his ability to negotiate proposed reforms with the 30 parties in Brazil’s fractious congress or to deal with tough trade partners, such as China and the US, is untested.
Critics say he did not pass a significant bill during his decades as a lawmaker — during which time he regularly voted with the left to defend the interventionist policies and special privileges he now criticises.
“The question is much more about the political capacity of the government to execute and define priorities than about the technical agenda,” says Marcos de Barros Lisboa, an economist and president of the Insper business school in São Paulo.
For Kevin Gibson, Latin America chief executive of recruitment consultancy Robert Walters, the change in economic sentiment after the election victory of Mr Bolsonaro has been immediate. Businesses have suddenly begun trying to recruit again after a long hiatus. “Companies believe the opportunities for growth are now far better and they want to beat the rush for talent,” he says.
After the economic disaster of the former PT government, which presided over a collapse in gross domestic product of more than 7 percentage points between 2015 and 2016, big business was eager for a change, analysts say.
Mr Bolsonaro has public support too. According to a survey by polling company Ibope, 64 per cent of Brazilians believe his government will be “good” or “great”.
In his favour is a cyclical economic recovery. Analysts surveyed by the central bank are predicting growth in gross domestic product of 1.3 per cent this year and 2.5 per cent next year. Inflation and the central bank’s benchmark Selic interest rate are subdued.
“We already have a cyclical recovery under way, inflation is low, the Selic is low and credit is recuperating,” says Leonardo Fonseca, chief economist at Credit Suisse in São Paulo.
These benign tailwinds are creating the conditions to tackle Brazil’s fundamental challenges — its ballooning fiscal bill and its excessive bureaucracy and taxes. The government’s budget deficit in 2018 was about 7 per cent, the central bank says. This has raised gross public debt to 76.3 per cent — high for a developing country, particularly one with Brazil’s history of elevated interest rates.
The pension system allows many people to retire in their mid-50s, especially career public servants. Last year, pension expenditure consumed a third of the government budget.
The unpopular outgoing government of Michel Temer, which took office after the 2016 impeachment of president Dilma Rousseff, was unable to get even a watered down pension reform through congress.
With his greater political capital, Mr Bolsonaro should be able to pass at least Mr Temer’s diluted reform, which sets a minimum retirement age for urban male workers of 65 years old and women of 62 years old, analysts said.
However, the military and police, his main constituents, would likely oppose a stronger reform, which would impact their own generous retirement systems. He would also need a constitutional majority of three-fifths of the lower house of congress to pass the measures.
Other ambitious reforms include a long list of proposed privatisations, streamlining the tax regime and opening up the economy by lowering tariffs.
“The argument usually used is that we need first to modernise the economy to be competitive then to open up,” says Mr Langoni. “I would say the opposite, we need to first open up to be competitive.”
If the pension reform passes, companies may start to feel confident about investing again as they would have less reason to fear that high government debt levels would be met with increased inflation. Most equity strategists expect the Ibovespa stock index to rally too.
“We see greater room for Brazil to keep surprising to the upside and for Mexico to behave in an opposite fashion,” says UBS Global Wealth Management in a note.
Mr Guedes, a 69-year-old native of Rio de Janeiro, describes his partnership with Mr Bolsonaro by referring to the words “Order and Progress” which are written on the Brazilian flag. In Guedes’ telling, Mr Bolsonaro represents “order” and the financier “progress”.
Mr Guedes has made market-friendly appointments, including fellow University of Chicago alumni Roberto Castello Branco as head of state-owned oil company Petrobras and Joaquim Levy, a former finance minister, as head of Brazil’s influential development bank BNDES. Rogério Marinho, an experienced congressmen, was appointed special secretary for social welfare.
“The latest appointments in the ministries have been very good,” says Insper’s Mr Lisboa.
However, there are a series of risks facing the new government. They start with Mr Guedes himself. He is under investigation over suspected fraud in dealings with state-owned pension funds — allegations he has dismissed.
Mr Guedes could also fall out with his tempestuous boss. Mr Bolsonaro will come under intense pressure from erstwhile allies when he introduces pension and other reforms. Oxford Economics says the second biggest “downside risk” for Latin America after a China slowdown is the possibility that “Bolsonaro fires his orthodox finance minister and fails to deliver on his promised economic reforms”.
The other risk is political. Mr Bolsonaro is pursuing a different way of doing politics in Brasília. Instead of allotting ministries among allied parties in congress, he has largely appointed technocrats and retired military officers to his cabinet. He is also wooing individual congressmen directly, analysts say, rather than negotiating with party leaders, who still wield power because of their control of election funds.
If congress turns hostile, Mr Bolsonaro could go “full Caesar” and appeal directly to the people via social media on important reforms, says Matias Spektor, a professor of international relations at the Getúlio Vargas Foundation. But this would be a fraught strategy. “It’s very unlikely that the people will take to the streets to put pressure on lawmakers because the reforms, particularly pensions, are deeply unpopular,” says Mr Spektor.
Corruption scandals are another emerging risk — especially given the role that the backlash against graft played in electing Mr Bolsonaro.
Prosecutors are investigating the finances of a former driver of one of Mr Bolsonaro’s sons, Flávio, who was elected to the senate this year, after it was revealed that large sums of money had passed through his account that had little relation to his income.
The Bolsonaros have denied responsibility. Onyx Lorenzoni, Mr Bolsonaro’s chief of staff, is also under investigation over receiving illegal campaign payments.
The other risk is the adherence of Mr Bolsonaro, his sons and some of his ministers to sometimes obscure rightwing and Christian ideas. Mr Bolsonaro has appointed as foreign minister Ernesto Araújo, a mid-level diplomat and Donald Trump fan who once described John Lennon’s song “Imagine” as “both the anthem of economic hyper-globalisation and the hymn of Marxism in its communist ‘dream’”.
The new government is re-orienting foreign policy towards Israel and the US and away from the Arab Middle East and China, which are major trading partners, without receiving any apparent concessions in return, analysts say.
The strategies are already exposing rifts in the new government between the ideologues and the pragmatists.
“Our relationship with either the US or with China has to be one of a global player,” says Mr Bolsonaro’s vice-president-elect, retired general Hamilton Mourão, who is emerging as one of the more cautious voices in the new government. “There has to be mutual benefits in this relationship.”
On other foreign policy issues too, the incoming administration is making what analysts call “mistake after mistake”. The president-elect is scepticalon climate change and the environment. His pandering to rural lobbies, which want to open up lands belonging to indigenous and traditional communities to agriculture, could compromise the international reputation of Brazil’s soyabean and meat exports, analysts say. Foreign farmers could use deforestation to pressure their governments to block Brazilian exports.
“It’s almost childish, a very simplistic way to move internationally,” says Michael Freitas Mohallem, a professor at law school FGV Direito Rio.
For now, markets are treating these controversies as the teething problems of a new administration. Whatever its ideological whims might be, say economists, it will have no choice but to pursue market-oriented reforms.
But with expectations sky high, Mr Bolsonaro will need to deliver — or his administration’s honeymoon with both voters and markets will be shortlived.