New Brazilian cabinet

Seven former military officers will be ministers, another three will occupy national secretaries' positions, while General Hamilton Mourão will be the vice-president.

• The military has been given control of important cabinet posts such as energy and infrastructure, it is also likely to remain a key adviser to the president.
• The military is unlikely to abandon its longstanding nationalist and protectionist stance entirely, but is likely to countenance the privatization of state assets considered not to be strategic.
• The adoption of a more liberal economic tone by the military ministers indicates likely support for some of the economic reforms to be promoted by the next economic minister Paulo Guedes and his economic faction

President-elect Jair Bolsonaro has appointed seven former military officers as ministers in his future administration, representing nearly one-third of his entire cabinet. Adding to that, former General Hamilton Mourão will serve as the country's vice-president, while another three senior officers will run important national secretariats.

Political co-ordination with Congress will be led by General Carlos Alberto Santos Cruz, as minister of the secretary of government; the Science, Technology and Communications Ministry will go to former Air Force pilot and astronaut Marcos Pontes; and defense to General Fernando Azevedo e Silva. The minister of transparency and control will be former Army Captain Wagner Rosário; while the secretary of national public security will be the responsibility of General Guilherme Theophilo.

In addition, Admiral Bento Costa Lima Leite de Albuquerque Junior, an expert in nuclear energy, will be the minister of mining and energy; and former Army Captain and engineer Tarcísio Freitas will be the minister of infrastructure (a new portfolio created by merging the Ministries of Transport, Ports and Aviation). The military faction will vie for influence with the economic liberal faction led by incoming economy minister Paulo Guedes and therefore a fluid working relationship between the two would be key to guarantee governability.

Energy, infrastructure, and privatization

Under Admiral Bento Costa nuclear energy and mining projects will be the main priorities. He has already announced that the Angra 3 nuclear power plant, currently on hold, will be completed. Completion will require an investment worth USD4.3 billion. Bento Costa has also vowed to prioritize uranium exploration and support improving operational conditions for mining in general. He favors speeding up mining concessions and has echoed Bolsonaro's criticism of the slow pace of environmental licensing under previous governments.

Although Bento Costa has expressed reluctance to privatize state-controlled oil company Petrobras, he and others in the military faction within the government, including Vice-President-elect General Mourão have indicated that they would not object to the divestment of Petrobras' non-core assets such fuel distribution. On Eletrobras, the military appears inclined to countenance privatization; this is in part explained by the dire situation of Brazil's public finances, which can be eased via extra revenue accruing from privatization. However, they will likely propose the introduction a golden share mechanism, which would give the government the final say on the company's future strategic decisions. The golden share mechanism, already used by Brazil in the privatization process undertaken in the 1990s, gives the state a veto over the sale of the privatized asset to a new owner.

On infrastructure, there is clear support for the private sector, particularly foreign engineering and construction companies, to assume a leading role. Incoming infrastructure minister Freitas was the coordinator of projects of the Program of Partnerships and Investments (PPI) - created by outgoing President Michel Temer to launch private concessions. He has already announced an ambitious plan starting next year to offer ports, airports, roads, and railways to private investors. Furthermore, he said all the airports currently under the control of Infraero, the state Airport Infrastructure Company, will be sold in three years and the company will shut down.

Generals Mourão and Heleno; the main figures within the military faction

Mourão has been gaining prominence despite occasional disagreements with Bolsonaro. He appears to be positioned to serve as the liaison between the government and the heads of the Armed Forces. His rapport with both the Armed Forces and the president would provide increased stability.

General Augusto Heleno, who led for years the UN peace mission in Haiti, will be the Minister of Institutional Security, the ministry that controls government intelligence. This appointment was a personal request of Bolsonaro, who indicated he wanted Heleno close to him at the presidential palace. Heleno has indicated that strategic companies would not be privatized, but that those generating "losses for the taxpayer" should be divested.

Corruption control and Armed Forces support

In addition to ideological affinity, Bolsonaro's decision to invite military officers to serve under his government is explained by other motives. Firstly, it fits with a campaign promise to end Brazil's political practice of offering ministerial posts to political parties in return for votes in Congress. Furthermore, with his own political party, the Social Liberal Party (Partido Social Liberal: PSL), lacking experience and a cohesive structure, the military offers a pool of good administrators. Secondly, Bolsonaro believes that by relying on the military corruption can be contained. His view is that by appointing military officers - which are not part of the political establishment - in the energy and infrastructure ministries, the scope for potential wrongdoing would significantly be reduced.

Outlook and implications

The cabinet appoints indicate the substantial influence the military is likely to have over President Bolsonaro. Given the strategic cabinet posts the military have secured, their role will be critical in determining the operational environment in sectors such infrastructure, energy, and mining. The military's longstanding policy of keeping assets considered as strategic in state hands suggests that support for full privatization is likely to be low. Bolsonaro himself has stated his opposition to the privatization of strategic state assets. However, Brazil's severe fiscal deficit and the need to balance the budget next year means that the military ministers will be willing to support the sale of certain state assets considered as non-strategic to generate revenue; such divestments will help to close the fiscal gap next year. This will likely include refining and fuel distribution at Petrobras; electricity distribution at Eletrobras; other assets likely to be divested are Brazilian postal company Correios and the computer services firm Serpro.

On infrastructure projects, there are indications the military welcome the participation of private investors in dozens of airport, railway, and port concessions due next year. Much of the regulatory work for these concessions has already been put in place by the outgoing Temer administration. This will be facilitated by the fact that incoming infrastructure minister Freitas was directly involved in the design of that regulatory framework.

Despite likely constraints on the privatization agenda, it appears that the military faction, particularly Mourão, is on good terms with the liberal economic faction of the government, led by Guedes. Should Guedes pursue only a moderate privatization agenda, it would raise the likelihood of the two factions working together, for a key indicator for the implementation of policies to reduce the fiscal deficit and to approve pension reform. Alternatively, a challenge to this smooth co-ordination between the military and economic factions of the government will likely come from how Bolsonaro intends to manage his government's relationship with congress. On the latter, it is not clear which faction will oversee reaching to Congress; this poses the risk of the government not speaking with a single voice and potentially causing infighting between the two factions.

Posted 19 December 2018 by Carlos Caicedo, Senior Principal Analyst, Latin America Country Risk, S&P Global Market Intelligence