Record joblessness (14.7%) and underemployment? Deepening poverty and a recrudescent pandemic that has already killed 465,000? No worries, Brazilian President Jair Bolsonaro and his Panglossian loyalists see no way but up.
Could they be on to something? Indeed, Brazil’s economy is stirring, thanks to booming agribusiness and surging prices for oil and minerals. Several banks have revamped their numbers, forecasting at least a 4% expansion of gross domestic product this year. “The economy will reelect Bolsonaro,” Fernando Bezerra, Bolsonaro’s leading man in the Senate said. But don’t be fooled.
“It doesn’t take much for Brazil to grow by 3% or 4%, especially after a sharp fall,” said Evandro Buccini, an economist at Rio Bravo, an asset management house. A sustained recovery is another matter: For that, Brazil will need less hubris and a mighty helping of divine intervention.
A severe dry snap has curtailed the flow of rivers and depleted reservoirs. In Brazil, this is not just a matter of inclement weather. Hydroelectric plants generate around two-thirds of the nation’s electricity, providing a renewable and mostly clean power source that has kept the economy humming and the grid clean, giving Brazil bragging rights in a world anxious to decarbonize. Yet with dam reservoirs at near 100-year lows, and the peak rainy season already gone, the specter of a country running on empty is back. Barring unlikely downpours, Brazil’s vaunted post-pandemic restart could evaporate as well.
The coming crunch also challenges some cherished shibboleths of energy sustainability in an economy mortgaged to St. Peter, Brazil’s patron saint of weather. This year’s drought — like the two before it in 2013-2014 and 2001 — lays bare the nation’s need for a reliable mix of power generation. That means a grid less indentured to hydro, wind and solar (around 73% of electricity) and more on natural gas (9%), biofuels and waste (9%) and, yes, even nuclear energy (3%).
That blend of brown and green power may disappoint environmentalists, who correctly push for a clean energy slate, but it offers an important backstop amid growing climate uncertainty. A more diversified matrix could also spare the country from resorting to enterprise-killing fixes —including soaring light bills, importing dirty diesel, and electricity rationing — just to keep the lights on.
Brazilians have taken some giant green steps. Thanks largely to legacy hydro, ethanol distilled from sugarcane, surging wind and solar power, Brazil’s overall energy matrix boasts four times the renewable energy mix of nations that belong to the Organization for Economic Cooperation and Development. That’s also the problem. “Brazil displays the woes and virtues of a power matrix based on clean energy,” said Bloomberg Economics analyst Adriana Dupita. “We rely heavily on the rain and the wind, which by their nature are unreliable sources.”
The severe 2001 drought shrank hydroelectric reservoirs to critical levels, leaving the country in the dark. In response, Brasilia imposed scorching light bills. When that didn’t work, it ordered select energy cuts. After seven months of rationing, gross domestic product growth fell from 4.4% to 1.4% by 2002; it didn’t rebound until 2008.
Don’t curse the skies. Brazil’s energy squeeze has many makers, but most of them are the result of unforced errors and populist short-circuitry. The timeline for the current crisis begins with Provisional Law 579, handed down in 2012, when then-President Dilma Rousseff, the left-wing Workers Party incumbent who was eyeing reelection, promised a 20% reduction in light bills.
That worked about as well as Brasilia’s many other adventures in fiscal dirigisme, discouraging conservation and further draining the nation’s workhorse hydroelectric reservoirs. They have yet to be replenished. The result was havoc in energy pricing and a stunted economy.
The economic brownout staggered Brazil but helped power Bolsonaro to office on a promise to let the free markets do their magic. Instead, seeing his popularity melt before rising gasoline prices, Bolsonaro abruptly sacked the head of Petrobras, the government-owned but publicly traded oil major. He also warned that other interventions were likely, including in the electricity sector.
Little has been done to fix the problem since. Instead of leveraging his considerable early political capital to privatize Eletrobras, the cash-starved government owned energy company, Bolsonaro dithered. Belatedly, congress is debating a bill to “capitalize” Eletrobras, selling off the state company’s stock while retaining a controlling “golden” share. Yet with Bolsonaro’s approval rates dimming, his allies wired the bill to light up his legislative base first and the grid second — including the extension of costly subsidies for renewables, even though they are already competitive with dirtier energy, and the greenlighting of thermoelectric plants in regions with no gas pipelines but plenty of votes to tap.
Brazil must walk a narrow line between honoring its international commitment to reduce carbon emissions — by 43% below 2005 levels by 2030, a commitment on which it is falling short — while also energizing economic recovery. But simply doubling down on fickle renewables and stringing up ever vaster skeins of transmission lines to send current from power-rich regions to energy-poor ones won’t work.
Distasteful as it sounds in a greening age, Brazil needs more and better thermoelectric plants to hedge for unseasonable droughts, preferably those powered by newer, cheaper and cleaner burning natural gas instead of dirty diesel. That the same oeuvre also serves pork for palace friends eager to cut ribbons is the collateral damage. Currently, Brazil squanders much of its natural gas by pumping it back into deep sea oil wells, creating a seller’s market for outdated diesel-guzzling electrical generators who seize on every emergency to sell sky-fouling fossil fuels at scalper’s prices.
Sadly, what has kept Brazilian growth from flickering out until now is not resilient enterprise but an underachieving economy, which has clocked another lost decade. Indeed, without Covid-19 and its devastating fallout, the country might already be heading for a reprise of 2001, when both homes and industry paid hefty utility bills and went dark anyway.
Brazil could conceivably avoid the worst-case scenario, but only by going all in on emergency brown energy as renewables falter. The tradeoff will be fouler skies and red hot utility rates, which are already clobbering high-demand industries such as steel and petrochemicals, which may have to decide whether to keep producing or reselling their surplus power on the lucrative open market. But as things now stand, Brazil will feel the blow; Buccini of Rio Bravo reckons growth could fall by as much as 0.5% of GDP, enough to blunt the recovery.
Energy expert Adriano Pires, at the Brazilian Center for Infrastructure, warns that the hit be could be worse: Not even thermal plants running full blast can compensate for the rapidly desiccating hydroelectric reservoirs. “If we don’t get more rain, Brazil will likely need rationing anyway,” he told me. “The economy is going to hit the energy wall, just as it did in 2001. And remember, back then the reservoirs were fuller than they are today.” Cue the prayers to the miracle-maker du jour, St. Peter or Dr. Pangloss.
Mac Margolis is a Bloomberg Opinion columnist covering Latin and South America.