What Happened

In light of recent regional unrest and better-than-expected economic numbers, Brazilian President Jair Bolsonaro may be playing it safe. After passing a pension reform bill in October and submitting additional economic reforms to Congress last month, Bolsonaro recently backed off measures to restructure government operations and improve the tax system until after municipal elections expected in October 2020. 

Pension reform — which has yet to go into effect — was the least controversial of Bolsonaro's promised reforms, as many in the country have recognized that the overly generous pension system would eventually bankrupt the government. Bolsonaro, however, is now also holding off on other, less-popular reforms, including overhauls to the government wage structure and improvements to public finances, at a time when riots have engulfed Chile, economic unrest has roiled Bolivia, Colombia and Ecuador, and Argentina has elected a populist president promising more government spending.

Why It Matters

Bolsonaro may have taken his foot off the pedal to ensure social stability in the short run, but his caution could cost him a chance to improve Brazil's economy over the longer term. Brazilian government spending and revenue are among the highest of all emerging market countries, with non-interest spending equaling about a third of gross domestic product. Public sector debt to GDP, for instance, exceeds an unsustainable 92 percent. Brazil is also a relatively closed economy, as trade accounts for only a relatively small portion of GDP.  

For domestic and foreign private investors, whom Brazil needs to improve infrastructure and help the country's economy to mature, reforms represent a crucial test of government resolve to restructure the economy. But in addition to his fears of provoking social unrest with far-reaching economic changes, the president may also be feeling the heat from former President Luiz Inacio Lula da Silva, who has excoriated Bolsonaro since his release from prison last month. In addition, better-than-expected growth numbers (Brazil's third-quarter GDP rose 0.6 percent over the April-June period, as well as 1.2 percent year on year) may relieve pressure for immediate action if Bolsonaro believes a pause in his reform push will spare him the fate of other leaders in the region.

What's Next?

It's too early to declare Brazil's economic reform effort dead, but it's clearly ailing, especially as Brazilians may already be weary of the economic reform process, even at the current early stage. At the same time, the International Monetary Fund has noted that mere pension reform will not suffice to fix Brazil's economy and stabilize its public debt level. In the end, delaying the implementation of pension reform threatens more controversial subsequent reforms — leaving Brazil vulnerable to the effects of a deeper global economic slowdown.