(Bloomberg) — Brazil’s President Jair Bolsonaro, who rose to power by painting himself a fiscal bulldog, is suddenly pushing to ramp up social spending, leaving markets startled and budget experts confounded.
After doling out some $57 billion in cash this year, the president on Monday revived plans to make part of that aid permanent. To pay for the monthly handouts, he pitched tapping into education funds and pushing payments on legal settlements down the road.
The backlash was fast and fierce: Brazil’s real is the world’s worst-performing major currency this week, and his own economy minister criticized the plan as a bad workaround. At the heart of the market’s panic is a widening primary deficit that Brazil badly needs to shrink.
“The problem is there’s no money,” said Gustavo Rangel, chief Latin America economist at ING Financial Markets.
Brazilian stocks and its sovereign debt rebounded Wednesday and Thursday as investors dug deeper into the numbers and decided Bolsonaro wouldn’t carry out the plan.
“The way it would be financed wasn’t seen as credible,” said Camila Abdelmalack, chief economist at Veedha Agentes Autonomos de Investimentos. “You can’t finance a welfare program with a liability.”
While Bolsonaro faces an uphill battle in getting his plan approved, his newfound appetite for social spending still spooked budget hawks. They can forgive him for the unprecedented stimulus needed to offset the coronavirus crisis — governments around the world pumped trillions of dollars into their economies and few can argue it wasn’t needed — but there’s little wiggle room for much more in Brazil. Already, Latin America’s largest economy is forecast to post a record budget gap of 12% of GPD this year.
“It’s clear that Bolosonaro doesn’t have the necessary conviction about the importance of fiscal discipline,” said economist Zeina Latif.
Bolsonaro’s embrace of state spending comes as his approval ratings have been steadily rising ever since the government ushered in what came to be known as corona-vouchers. The monthly aid for informal workers benefited some 67 million people, or about 32% of all Brazilians, and actually lifted large swathes of the population out of poverty.
Read More: Brazil Hands Out So Much Covid Cash That Poverty Nears a Low
It’s credited by economists for saving Brazil from the deeper recessions that have rocked neighboring countries. But its astronomical price tag — 320 billion ($57 billion) — has stoked concerns the South American nation is headed toward a financial cliff even as it began paring back the aid this month. Bolsonaro’s latest pitch, which is known as Citizen Income, comes with a price tag of 50 billion reais.
The plan is “creative” but inviable, said Daniel Rico, Latin America currency strategist at RBC Capital Markets LLC in New York. “It’s becoming harder and harder for the government to find sustainable ideas to fund the social programs without breaching the cap” on spending that’s constitutionally mandated, Rico wrote in an email to clients.
The move, meanwhile, has also become the latest flash point between Bolsonaro and Paulo Guedes, economy minister and market darling. After stocks and the currency tanked Monday, Guedes batted down the idea of diverting money from legal funds.
“We’re here to honor fiscal commitments and debt,” he said in a news conference Wednesday.
Guedes’s decision to withdraw support to finance the Citizen Income program using court-ordered payments annoyed government leaders in congress and took negotiations back to square one, according to four people with knowledge of the matter who asked not to be named because discussions are private. The economic team now sees any solution to the impasse coming only after municipal elections in November.
In any case, Bolsonaro said on late Thursday that his confidence in the economy minister remains at 99.9%. And major voting blocs of lawmakers have signaled their opposition to raising the fiscal-spending celling again, after already boosting it once this year.
“We don’t think wholesale abandonment of the spending cap is likely,” said James Barrineau, head of emerging-market debt at Schroder Investment in New York. “Ultimately the economic team and Bolsonaro are closely attuned to market disquiet when it erupts.”