Can the South American giant emerge stronger from its latest crisis?
By Jason Agnew
“Brazil é o pais do futuro e sempre será.” It was a phrase I would hear often during my time living in São Paulo – Brazil’s financial heart.
It was the early 1990s, a time when the country was threatening to be a stable and powerful economy. With a dark humour borne from years of political and economic turmoil, the locals repeated their curious expression over and over… “Brazil is the country of the future and always will be.”
Behind the wry laughter lay a weary resignation that despite being a country blessed with so many natural resources, and a land so fertile you could grow virtually anything, the elites lacked the will to change the status quo and let this sleeping giant realise its huge potential.
By 1994 – two years after the impeachment of president Fernando Collor de Mello – inflation stood at a staggering 47% a month (4,922 % per annum) causing the then Minister of Finance Fernando Henrique Cardoso to launch a new currency, the Brazilian Real, underpinned by stringent monetary supply (M1) controls.
To the amazement of many, the real proved to be resilient and inflation fell to levels Brazilians had not experienced for a long time. Indeed, such was the success of his ‘Plano Real’, Cardoso, known by his initials FHC, was duly elected President of the Republic in a landslide election win later that year and took office on January 1 1995.
Over the next four years, the stabilised economy started to grow without provoking the old scourge of inflation and FHC was re-elected, defeating the leader of the Workers’ Party (PT), Luiz Inácio Lula da Silva (Lula) in what was his third consecutive defeat in a presidential poll.
However, the seemingly unelectable yet tenacious former trade union leader and left-wing firebrand would have his day, and Lula eventually became the 35th president, assuming the position on the first day of 2003.
Assuaging the trepidation of the middle classes, and benefiting hugely from a boom in commodity prices, the socialist administration introduced no punitive taxes, continued to liberate markets, and stimulate growth, whilst at the same time pulling millions out of the abject poverty many had become almost resigned to, with social programmes such as Fome Zero (Zero Hunger) and Bolsa Familia (Family Allowance). In January 2008, Brazil became a net creditor for the first time, after decades of being the world’s largest debtor.
Feted abroad by world leaders from all sides, and enjoying record approval ratings at home, by the time Lula reached the limit of his two-term mandate, he was able to anoint his successor and the electorate enthusiastically voted in Dilma Roussef as the nation’s first female leader.
Brazil was surely, at last, the country of the present. The era of the BRICs was in full swing. Dilma’s first term ran relatively smoothly and she was rewarded with a second tenure (a fourth consecutive for the once pariah-like Workers’ Party).
However, just over three years in to her initial term, a small investigation into money laundering at the Tower (Torre) petrol station in the federal capital Brasilia was attracting the interest of some of the nation’s judges looking into much larger scale corruption.
On March 17 2014, while Brazil was preoccupied with holding the football World Cup after a wait of sixty-four years, Judge Sergio Moro in Curitiba issued warrants for four supposedly small-time money launderers using the petrol station or, more aptly, its car wash. Most Brazilians didn’t blink an eyelid. Moro decided to dig deeper and it was then that he discovered that one of the ‘doleiros’ (black-market money dealers) had links with Paulo Roberto Costa, ex-chairman of Petrobras, by far the nation’s largest company, presided over by Dilma Roussef herself between 2003 and 2010 when it floated a partial share offering of $70bn, the largest anywhere in the world in history, making the São Paulo stock exchange (Bovespa) second only to Hong Kong almost overnight.
In 2006, Petrobras had discovered oil off the coast of Rio de Janeiro in the Santos basin. It was a huge field with an estimated 7,500 million barrels of recoverable oil. President Lula himself turned up for the inauguration, and one field was renamed from Tupi (indigenous people) to Lula (also the Portuguese word for squid for ambiguity’s sake). This created a very bullish atmosphere and with so much money in play and so many construction and service contracts up for grabs, the possibilities for corruption were rife.
Judge Moro and public prosecutor Deltan Dallagnol, realising that this scandal was potentially bigger than any of its many predecessors, decided to use plea bargaining, not usual in Brazil, and the small guys started to ‘sing like canaries’ in return for reduced sentences.
What emerged was off the scale. A few top officials in the company had colluded with an organised cartel of sixteen companies to overcharge Petrobras for construction and service work in return for bribes and kickbacks which amounted to just over 3bn US dollars. The names on the list included the cream of the Brazilian business world. Companies such as Odebrecht, the largest engineering and contracting company in Latin America, and Andrade Gutierrez.
As more details emerged, the reach of the scandal surpassed all expectation even in a country so accustomed to corruption. So far there have been over one hundred and sixty arrests and 9.5bnUSD is believed to have changed hands.
President Dilma Roussef was impeached and removed from office, although many believe that happened because she had let the investigations proceed and other politicians wanted to impede the process. The man who led her impeachment, devout evangelist and ex-president of the Chamber of Deputies (Brazil’s lower house), Eduardo Cunha, was arrested and charged with taking bribes to the tune of 40m USD. He was sentenced to 15 years behind bars in March of this year.
In May, the newspaper O Globo obtained recordings of current president, Michel Temer, telling the chairman of JBS – the world’s biggest meat-packing company – to keep paying bribes to Cunha. However, on August 2, the House of Deputies narrowly voted to reject a corruption charge, saving him from trial at the Supreme Court and ignoring the estimated 80% of the populace who wanted him put on trial. Many equate what is happening to a coup d’état.
The list of the accused reads like a who’s who of the Brazilian establishment, and includes both ex-presidents Lula and Fernando Collor de Mello, seemingly back to his old tricks, as well as the treasurer and chief-of-staff of the Workers’ Party and Brazil’s erstwhile richest man and golden boy, Eike Batista.
The scandal has not even confined itself to the country’s borders, with the Peruvian president having been accused of involvement, the director of Argentina’s Federal Intelligence Agency charged with corruption and the president of the Panameñista party in Panama being dismissed.
Many Brazilians, whilst fervently supporting the judiciary, who have become celebrities and receive standing ovations in restaurants and other public places, were sceptical that the great and the good would be punished, but then Marcelo Odebrecht was given a nineteen-year jail sentence along with several other previously untouchable billionaires. Public opinion slowly came round to the idea that things might be changing. This faith was severely tested in January 2017 when a plane carrying Supreme Court justice, Teori Zavascki, in charge of the corruption trials, crashed into the sea just off Paraty in Rio state reminiscent of previous ‘accidents’ in the country’s history.
Yet, despite that setback, the process moved relentlessly on. Since then, ex-president and expected candidate for the 2018 elections, Lula has been found guilty of accepting bribes to the sum of 1.2mUSD and handed a nine-and-a-half-year prison sentence.
His side have described the accusation and subsequent trial as ‘arbitrary, illegal and unjustifiable’, and many people believe the objective is to stop him running for the presidency next year as, according to the New York Times, he is still by far the most popular politician in the country.
He has appealed and will stay free during that process.
In the three-and-a-half-year period since Operation Car Wash started, the previously robust economy has constricted quite severely, shrinking by 3.8% in 2015 and 3.6% in 2016, making it the country’s worst ever recession. Investment plunged by 10.2% in 2016, this attributed by many as due to excessively high interest rates. Trade barriers remain high, making both imports and exports expensive. Unemployment reached a record high rate of 13.7% compared to the record low of 6.2% as recently as 2013. In the same period, the number of filings for bankruptcy reached a record and Brazil lost its investment-grade rating.
On the other hand, the real rose 20% against the dollar in 2016 and FDI picked up in the second half of the year. Inflation stayed relatively low at 4.5%, although that is probably down to lower demand.
Carlos Sawall, chief economist at Banco Safra in São Paulo, is cautious: “We see zero growth in 2017, or maybe just a little bit above that. We should not see any big recovery this year; we will have to wait till 2018.”
This is refuted by the Finance Minister Henrique Mireilles who believes that indicators ranging from record soya production to a 15% hike in car output to increased supermarket sales. Like many of his counterparts in the west in the last decade, he believes reduced spending together with budgetary and pension reforms, austerity to many economists, will stimulate a recovery.
In July, referring to the 2018 General Election, he stated: “If you ask me who is going to win, I believe that a reformist message will win. The populist position has already been sufficiently tested and the result has been negative. The population is aware of this.”
The OECD forecast is confident that the government’s focus on overhauling the taxation system and reining in the bloated pension sector is putting the economy back on the right track.
They observed that ‘the economy is finally emerging from a severe and protracted recession and that agricultural exports are on a strong footing’. They believe that unemployment will start to decline only towards the end of the year. They noted that inflation has decreased significantly but that this is mostly due to lower demand and they warned that trade barriers remain too high.
Market Realist pointed out that the real rose 20% against the US dollar in 2016, which might show market confidence but could also harm an export-led economy.
Supporting this apparent confidence was the fact that foreign direct investment (FDI) had picked up in the second half of last year.
Arminio Fraga, ex-president of the Brazilian Central Bank and erstwhile associate of George Soros, in an interview with one of the country’s leading newspapers, A Folha de São Paulo, stated: “The Brazilian economy will only start growing again with any impetus when there is clarity as to the political forces that are going to lead the next government. If there is a swing to populism, that could all go pear-shaped.
“Whoever gets elected next year, even if Brazil avoids the extremes in its range of candidates, it will be necessary for the next government to have a degree of competency and motivation that is highly implausible,” he added. Not exactly a vote of confidence.
So, it would seem that Brazil is embracing austerity almost ten years after the rest of the world, when strong commodity prices and a robust internal market in part stimulated by the central government meant that the crisis left the country relatively unaffected.
One thing is for sure, the stakes in next year’s general election are extraordinarily high, perhaps explaining the establishment’s concerted efforts to keep Lula from running, even if that means incarcerating him. And of course, the congress will be composed of many of the same faces or, as Fraga puts it: “The old Brazil will continue to be very well represented, which will make things difficult”.
‘Brazil is the country of the future and always will be’. Maybe it was premature to write the old adage off.