Suddenly Flush With Cash, Brazilians Can Help by Spending It All

  • Temer stimulus frees up almost $10 billion from severance fund
  • Most Brazilians say they’ll save windfall. Maybe so, maybe not

Is More Volatility Ahead for Brazil in 2017?

Honeymoons on the Mediterranean aren’t the kind of investment that Brazil’s compulsory savings plan was set up to finance.

Employers have to pay a chunk of their workers’ salaries into the fund, and normally the employees wouldn’t be allowed to take anything out unless they’re fired, or get sick, or buy a house. But the government, desperate for some economic uplift, has suspended those rules. Starting today, Brazilians can dip into their accounts and spend the money however they like.

Read more: 2016 Was Awful for Brazil and 2017 Doesn’t Look Much Better

Customers line up to speak to an employee at the Caixa Economica Federal bank in Rio de Janeiro on March 9.

Photographer: Dado Galdieri/Bloomberg

So Sabrina Orlov, a newlywed 34-year-old publicist from Sao Paulo, is off to Israel and Jordan with her 30,000 reais ($9,500) windfall. “I’m very excited about it,” she said. “It came at a very good time.”

For Brazil’s economy, it’s been a terrible time. In 2016, it shrank 3.6 percent, the second straight year of grinding recession. And that’s the point. President Michel Temer has pledged to trim one of the world’s biggest budget deficits, so traditional stimulus isn’t an option. But Temer says that freeing up at least 30 billion reais from the savings fund could add half a percentage point to growth this year.

Read more: Brazil’s ups and downs -- a QuickTake explainer

Will it work? Maybe, but economists are skeptical. It depends who gets the money and how they use it.

Since Temer announced the plan in December, Brazilians have been lining up outside the state bank Caixa Economica Federal to find out the size of their payout.

Job seekers line up outside the Municipal of Education and Culture to apply for work in Rio de Janeiro.

Photographer: Dado Galdieri/Bloomberg

At a branch in downtown Brasilia last week, the majority had already figured out their plans. One cafe worker said he intended to open his own restaurant. A doorman said he’d fix his car. Most people, like cleaning supervisor Zelia Caetano, said they planned to clear debts. That matches an online poll last month in which more than 70 percent of respondents said they’d invest the money or use it to pay down arrears.

Should they do so, the boost to consumption will be limited. But, says economist Otto Nogami of the Insper business school in Sao Paulo, that’s not really the Brazilian way.

‘Brazilians Will Spend’

“Without a doubt, Brazilians will spend,” Nogami said. “It’s one thing to respond to a survey saying you will save. But when you get the money in your hands, it is the characteristic of the Brazilian to consume -- and resolve the debt at some point in the future.”

Brazil is not a nation of savers. World Bank figures from 2015 show gross savings of just 14 percent of GDP, compared with a world average of 25 percent. That’s one reason the fund was set up in the first place, during a period of military rule -- to mitigate risks for workers, while helping finance government investment in housing or urban infrastructure. The amount available for withdrawal is less than 10 percent of the fund’s total holdings, but could still curb its capacity to invest.

Shoppers walk through a market in downtown Rio de Janeiro.

Photographer: Dado Galdieri/Bloomberg

Adriana Dupita, an economist at Santander, has studied the likely distribution of cash from the fund, and concluded that it’s skewed toward the Brazilians least inclined to blow it.

“The money is concentrated in the hands of few people,” Dupita said. “These people are less likely to use the money for consumption and are more likely to save.” About 80 percent of applicants will receive 1,500 reais ($480) or less, according to Santander’s research.

‘It’s Our Right’

So the benefits for the economy are moot -- and the same goes for the likely impact on Temer’s approval ratings, currently languishing around 10 percent. That’s the level achieved by his predecessor, Dilma Rousseff, shortly before she was impeached.

Maria Marlene, a 59-year-old maid who said the payout will “help with the household bills,” was upbeat. “It’s money that you are getting which was going to stay with them, with the government,” she said. And of Temer: “He’s doing better than the other one.”

But Caetano, also waiting in line at the bank, didn’t think that granting Brazilians access to their own money was a great favor bestowed by the president. “It’s our right,” she said, “Let’s not kid ourselves.”

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