Brazil’s Market Revolution

Brazilian inflation is now around 3.5% a year, and real interest rates have dipped to between 2% and 3%. Credit-default risk is easing, the stock market is climbing, and forecasts for growth are improving-though still well below what Brazil needs to become a developed country.

This brighter outlook, after nearly three years of recession, began during the presidency of Michel Temer, who took over after Workers’ Party President Dilma Rousseff was impeached in 2016. But it has gained momentum since the inauguration of President Jair Bolsonaro in January.

In a speech to the United Nations General Assembly last week, Mr. Bolsonaro showed why he was elected. Two days after the Turtle Bay crowd feted a privileged Scandinavian teenager for delivering a climate harangue, Mr. Bolsonaro went before the assembly and invoked God, sovereignty and “the yearnings and ideals” of the Brazilian people.

He denounced the “colonialist spirit” of the global elite, the socialism that spawned the dictatorship in Venezuela, and Cuba’s conscription of doctors sent abroad to earn money for the regime. Left-wing rule, he said, left Brazil with “widespread corruption, serious economic recession, high crime rates, and continuous attacks against family and religious values that are part and parcel of our traditions.”

The speech was a challenge to U.N. orthodoxy. Many Brazilians celebrated it even as alarm spread in the salons of New York and Paris and newsrooms around the globe.

Mr. Bolsonaro refuses to bow to green gods and the international thought police, and for this he is condemned. Yet something fresh and important is happening in Brazil even if ideologues at the U.N. are too wrapped up in environmental clichés and special-interest politics to recognize it.

Mr. Bolsonaro could turn out to be one more old-school politician. But surprisingly, his agenda looks like a game changer for millions of impoverished Brazilians. If his critics were interested in Brazil’s future, they would hold him accountable for his promises instead of bad-mouthing him.

Take his pledge to reform Brazil’s national development bank, BNDES, founded in 1952. Like many development banks, BNDES has largely served the politically powerful and has played an outsize role in the country’s recurring economic debacles.

Last week in New York I interviewed Gustavo Montezano, a 39-year-old former investment banker and the sixth BNDES president in four years, about the reform agenda. If he fulfills promises to reduce the damage the bank does to economic growth, he will also have to reduce its usefulness as a political tool. That would be revolutionary.

Mr. Montezano says BNDES reform fits into the government’s broader economic liberalization. Mr. Bolsonaro has already won approval of a long-overdue reform of the pension system, launched an aggressive privatization program, and won the passage of laws to reduce the regulatory burden on business.

The Journal’s Paulo Trevisani reported on Sept. 23 that the government is “opening up one of the world’s most closed big economies, slashing import tariffs on more than 2,300 products and exposing local industries long accustomed to protectionism to the challenges of free trade.” Still to come, Mr. Montezano told me, is simplification of the tax code and an “overhaul” of public-sector administration.

For most of the past six decades, politicians on the right and left have protected the BNDES status quo. The bank is financed by workers through a payroll tax, though they rarely benefit.

Instead the influential receive government-guaranteed below-market loans for their companies, public and private. When loans go bad, the losses are piled on the national debt. This indebtedness raises the cost of borrowing for Brazilians who lack political clout.

A notable BNDES-financed project was the Port of Mariel in Cuba, where the bank lent more than $500 million and Brazil guaranteed the loans. Most of that money is lost, according to Mr. Montezano, who also says there is “a perception” that the Mariel contracts are priced two to three times above actual costs.

Mr. Montezano says BNDES will end the practice of subsidizing loans, pay back money owed to the treasury, and move the bank’s focus to facilitating the flow of private capital to infrastructure projects aimed at development. “Ideally, we shouldn’t use our capital,” he says. “If there is a private bank to finance the project, we should step out.”

If the “no subsidies” pledge holds, there will be no more BNDES lending. But Mr. Montezano envisions the bank taking a greater role as a financial-services intermediary in federal, state and municipal projects and in concessions and privatizations, all of which need the high-quality technical expertise the bank can provide. The goal is “less lending, more development.” It isn’t unlike BNDES’s privatization work in the 1990s.

BNDES reform is another major departure from business as usual in a top-heavy state. It is also another test of whether Mr. Bolsonaro is serious about changing Brazil.

By Mary Anastasia O’Grady