Avoiding the abyss: finding a way ahead for the Brazilian economy


Financier Worldwide Magazine

July 2015 Issue

July 2015 Issue

If ever a list was compiled of the world’s most put-upon presidents, one would surely wager on Dilma Rousseff, president of Brazil, appearing close to the top. Ms Rouseff is in the midst of a perilous situation, as her country experiences rising unemployment, rampant inflation and an economy expected to do nothing but shrink.

Simply put, at present, the Brazilian economy is in pain.

The fundamentals of this pain can be summarised swiftly enough. Brazil’s central bank raised its main interest rate to 13.25 percent on 29 April 2015, the highest it has been in six years and at odds with global rates close to zero. The economy is expected to shrink by 1 percent in 2015 while inflation is projected to rise to over 8 percent. In addition, the jobless rate rose to 6.20 percent in March 2015, the highest for almost two years.

The reality of a Brazil in freefall, juxtaposed with the ongoing Petrobras scandal and plummeting presidential approval ratings, sets the scene where significant social and economic disruption will be the norm going forward.

To establish the reasons why Brazil is currently beset by financial failures and political scandal, one must consider how the country is governed – both before and after the election of Dilma Rousseff as president in 2011 (succeeding Luiz Inácio Lula da Silva).

The path to an economic crisis

To what, then, should Brazil’s economic woes be attributed? For many, President Rousseff of the Workers’ Party has cut a less than inspiring figure amidst the turbulence, and it is certainly true that many of her initiatives, such as the adoption of developmentalist policies, did not meet with the desired success.

“The crisis is political more than anything,” opines Fernando Luiz Lara, chair of the Brazil Center at the University of Texas. “It is clear that the economic expansion based on consumption – strong wage rises which fuelled consumption and boosted the economy – which created the miracle of growth with distribution during the Luiz Inácio Lula da Silva years, from 2003 to 2011, has stalled. “Some important reforms such as tax code and election financing have not been carried out and are now more urgent than ever. Former president Lula was very effective in changing the ends of public policy and forced a distributive policy that was very successful on many levels. However, he did not change the means, meaning the pork-barrel, give-and-take negotiations with the National Congress remained the same,” he adds.

Significant social and economic disruption will be the norm going forward.

According to many analysts, during the 2014 Brazilian election it was evident that the centre-left coalition of president Roussef did not wish to change anything in terms of how policy is negotiated and implemented. However, this stance led to the centre-right (and extreme right) opposition parties using the problematic means, left unchanged by former president Lula, as political slogans in order to influence the ends of public policy.

“The opposition parties lost the presidential election but succeeded in gaining power in the National Congress,” relates Mr Lara. “As a result, President Rousseff has pitted against her an aggressive media and a conservative National Congress, on top of an economic stall. In contrast, Lula is a skilled negotiator and has demonstrated over and over again that he has the ability to get out of huge problems which somehow leave everybody happy. Needless to say, President Rousseff does not have this talent, and with the political articulation now having officially transferred to the PMDB – the Brazilian Democratic Movement party – she has been left even weaker.”

Ultimately, such political shenanigans have done little to help Brazil as it struggles to avert what is feared to be economic disaster.

Petrobras: the ugly face of Brazilian industrialisation

Any discussion concerning Brazil’s current economic problems will, at some point, reflect on the extent of the bribery and corruption that exists in the country. This, in turn, will be exemplified by the Pertrobras scandal and the impact it has had, or is having, on the economic credibility and stability of Brazil. Certainly, the skulduggery surrounding the state-run multinational energy corporation Petrobras, Brazil’s biggest company, is extensive, alleging that money from kickback schemes on contracts worth in the region of $4bn was illegally donated to political parties.

In fact, President Rousseff, who at one time chaired the Petrobras board, has already been exonerated of involvement in any impropriety by Brazil’s attorney general. Despite this, more than 40 senior politicians – including the presidents of both the Federal Senate and the Chamber of Deputies – are still under investigation with the treasurer of the country’s Workers’ Party, Joao Vaccari, having stepped down following his arrest in April 2015. Mr Vaccari is the closest ally of President Rousseff to have been connected with the Petrobras scandal.

The Petrobras scandal, also known by the moniker Operation Car Wash, has so far seen two former Petrobras executives – Renato Duque, former director of services, and Paulo Roberto Costa, former director of downstream operations – charged with money laundering and racketeering offences. Costa is on record admitting that he took bribes from construction firms in exchange for ensuring successful contract bids.

“Anybody with a minimal amount of information knows that corruption is a serious problem in Brazil and runs, to a larger or lesser degree, in every aspect of society,” concedes Mr Lara. “The fact that construction company owners are being investigated and jailed is a positive novelty, as before only public servants were perceived as corrupt, never the ones paying the bribes. This crisis could help build the momentum for changes to campaign finance laws, but this is unlikely given the stance of the current National Congress. In terms of the economy, the Petrobras scandal does add to uncertainty and the overall perception of a stalled economy.”

Amid all the corruption and scandal, the first hint of potential salvation for Petrobras arrived with the April 2015 publication of the company’s audited financial statements, which provide some hope that the toxicity surrounding the Petrobras name may yet be diluted. “The publication of the financial statements removed the risk debt-acceleration demands by creditors and the threat of a technical default,” says Gustavo Rangel, ING’s chief economist for Latin America. “This may also represent the most important first step in the company’s path to recovery. As highlighted by Brazilian finance minister Joaquim Levy in presentations to investors in the US, a recovery would also reflect the considerable overhaul in the company’s governance structure, with the appointment of a large contingency of private-sector names to the company’s board.”

Although the Petrobras scandal appears to represent the very extremes of corruption, one must be careful to avoid giving the impression that Pertrobras is alone in perpetrating financial misdemeanours on a large scale. Concurrent, but much less well-known, are ongoing investigations into companies suspected of paying bribes to members of Brazil’s Conselho Administrativo de Recursos Fiscais

 the Administrative Council of Tax Appeals (CARF) – in order to reduce or evade tax liabilities.

Furthermore, according to the Brazilian newspaper, O Estado de S. Paulo, 70 companies are currently under investigation for bribery, yet Petrobras remains the focus of the media’s interest; unsurprisingly so, as the scandal penetrates the very heart of government.

Transformational initiatives

The appointment of the straight-taking Joaquim Levy as finance minister, a move long overdue in the eyes of many, has seen President Rousseff credited with taking positive action to address her country’s economic problems – cutting costs and, importantly, safeguarding Brazil’s investment grade rating. To this end, a raft of initiatives have been unleashed by Levy, all designed, in the main, to plug the yawning gaps in Brazil’s fiscal accounts.

“Initiatives that appear to be on the agenda include long-overdue tax reform issues such as the simplification of Brazil’s state tax system and a complete overhaul of the ICMS state tax,” states Mr Rangel. “Also under consideration are measures to boost long-term sustainability of the social security system, with a focus on rural benefits, changes to labour laws, changes to incentives embedded in unemployment benefits, survival pensions and outsourcing, along with a renewed push to facilitate external trade through reduced bureaucracy. Even highly controversial initiatives such as the introduction of formal central bank independence and changes to the energy law, incorporating a reduced participation of Petrobras in future actions, have surfaced recently.”

But some observers, including Mr Lara, are less convinced as to the likely effectiveness of such initiatives. “Levy’s measures can signal to the market the willingness of President Rousseff’s government to keep playing by the market orthodoxy, but it does nothing to solve the political crisis at the root of everything,” he says.


With the backs of the Brazilian political hierarchy very much against the wall, much thought has been directed toward the action that needs to be taken to stimulate growth, lift the country out of its existing malaise and boost economic growth. Thus far, this action has consisted of new finance minister in Joaquim Levy, and the introduction of sweeping austerity measures designed to safeguard the country’s investment grade rating.

“Dilma Rouseff’s administration has been in the corner of the ring since she was re-elected president in October 2014 and needs to get back into the fight with a much improved political articulation and communication strategy,” says Mr Lara. “Otherwise, we will have four more years of suffering – a quite plausible scenario when you consider that there are people amassing money and power during the current crisis.”

If President Rouseff’s government can get to grips with the issues currently causing so much despair, economic recovery may come sooner rather than later. “The administration’s hope is that, as uncertainties are lifted and market confidence in its commitment to a sound fiscal stance deepens, the improvement in business sentiment could happen relatively rapidly, perhaps during the second-half of 2015,” says Mr Rangel. “That improvement should also depend on the administration’s ability to move policy focus beyond the current ‘correction phase’, toward a ‘growth-enhancing phase’. We maintain a relatively benign view that the corrective policy shift spearheaded by Joaquim Levy is likely to bear fruit. The minister’s frequent assertion that 2016 will be the year of the recovery is gaining traction, thanks to his self-assured performance in selling his plan for Brazil to foreign and domestic audiences, with an intense agenda of meetings with the private sector and the National Congress.”

Such views testify to a positive outlook for Latin America’s largest economy, suggesting that, despite the major difficulties currently being experienced, the question of a Brazilian economic recovery is largely a matter of when, not if.

© Financier Worldwide


Fraser Tennant

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