Brazil’s Lost Decade? - Global Trade Magazine
  June 1st, 2016 | Written by

Brazil’s Lost Decade?

[shareaholic app="share_buttons" id="13106399"]

Sharelines

  • Brazil’s economy contracted by 3.8 percent in 2015 and a further three-percent drop is expected in 2016.
  • The deep economic recession has now been topped off by the impeachment of President Dilma Rousseff.
  • A money laundering and corruption investigation by Brazil's federal police was the main reason for Rousseff’s fall.

Brazil is in the midst of a perfect storm of political upheaval and economic contraction, as outlined in an economic report released recently by the global credit insurer Coface.

Brazil’s economy contracted by 3.8 percent in 2015 and a further three-percent drop is expected in 2016. The deep economic recession has now been topped off by the impeachment trial of President Dilma Rousseff. No significant economic rebound is expected before 2017.

On May 12, 2016, Rousseff was temporarily removed from office after the Senate voted on an impeachment trial. The proceedings concerned breaches of the Fiscal Responsibility Law, particularly fiscal irregularities. Now that Vice President Michel Temer of the PMDB Democratic Movement) party has assumed the presidency, the upper house will have 180 days to convene a trial. Rousseff will be removed from office if two-thirds of the Senate vote in favor, in which case Temer will serve out the remainder of the presidential term, ending in 2018.

The so-called car wash investigation by Brazil’s federal police—initially focused on money laundering and later expanded to cover allegations of corruption at the state-controlled oil company Petrobras—was the main reason for the uprising against Rousseff’s government. The investigation has brought some of Brazil’s most important businessmen and political figures to justice and has raised suspicions that Petrobras money may have been used to pay for political campaigns, to buy political support in Congress, and for personal enrichment.

Petrobras wrote down $2.3 billion on its 2014 balance sheet, representing additional costs improperly capitalized in the corruption scheme uncovered by the car wash investigation.

Although the market has reacted positively each time there is favorable news on the impeachment, Coface does not expect a strong rebound since the vice president’s party is also being investigated for corruption, making it difficult for them to present a viable alternative to the current government.

The economic results for 2015 were the worst since 1990. The adjustment of government-administered prices, which were artificially low, and the strong depreciation in exchange rates drove inflation to 10.7 percent. Fiscal adjustments have failed and both public debt and the fiscal deficit deteriorated in 2015. Coface downgraded the country’s assessment from A4 to B (significant risk) in September and then again, to C (high risk), in January 2016. The three main credit rating agencies have downgraded Brazil to junk status.

The economy will not begin its recovery before the political impasse has been resolved. The first challenge will be the fiscal results for 2016. The 12-month accumulated deficit as of March 2016 stands at 2.28 percent, making the 1.6-percent proposal of Rousseff’s government seem unrealistic.

The revival of business confidence seems only temporary in the short term. Temer is entering office with weak support from the population since he was not elected directly and his party is also highly linked to the car wash scandals.

Only two indicators are expected to improve in the short-term: trade balance and inflation. With regard to foreign trade, import and export revenues have both been falling. Although the sharp depreciation in exchange rates over the last year has finally improved the competitiveness of locally manufactured products, the weaker currency has reduced export prices in U.S. dollars. So far, the improved export volumes have not been enough to result in higher revenues.

Industrial production in Brazil has been slowing for 24 months in a row. In the 12-month period ending in February 2016, the sector contracted nine percent with no signs of improvement. The population is not willing to consume, as the job market has been deteriorating quickly and entrepreneurs are not investing due to the environment of high uncertainty.

The unfavorable scenario has also spilled over into the economy´s major sectors, leading to higher insolvency rates. According to Coface’s sector barometer, the country’s main segments of activity are currently at high risk. The situation is still worse for the construction, automotive and steel industries, which are currently at very high risk.

“There is no easy way out of the crisis and the population is tired of corruption, which makes a short term rebound in confidence unlikely,” says Patricia Krause, economist for Coface Latin America.

The anti-government protest of March 13 was the largest in the country´s history, with three million participants. It showed that the population is not only displeased with the incumbent government, but more in general with all of the politicians under investigation. Whatever the outcome of the political dispute, the high fragmentation of Congress will continue to hamper the advancement of the country’s much-needed structural reforms.

“In summary, two things are clear,” concluded the Coface report. “An economic rebound will not be immediate. There should be slight improvements in confidence and possibly mild GDP growth rates starting in 2017. However, the current decade could be a lost one in terms of economic activity.”