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Analysis
A road less travelled

A road less travelled

Brazil’s crisis may spell political change

by David Smith

Mon 17 Aug 2015

This past weekend, tens of thousands marched through the major cities of Brazil for the third time this year, demanding the impeachment of President Dilma Rousseff, who is confronting a major political scandal at a time of economic crisis.

Even with lower numbers, the symbolism spoke volumes. Thousands occupied Copacabana Beach in Rio, wearing the country’s yellow-and-green football shirts and carrying signs saying: ‘Dilma out.’ In São Paulo, the industrial engine room of Latin America, over 100,000 people took over the city centre to insist the president should go. Even in her home city, the mining capital of Belo Horizonte, the crowds gathered.

Despite the circumstances, Rousseff appeared remarkably calm – surprising in a country where a president has been ousted by street protests as recently as 1992. In an interview broadcast on the eve of these demonstrations, she insisted that she had no intention of resigning. Ducking all offers to criticise her opponents, she remarked: ‘We Brazilians are learning how to live with each other in openness, despite our differences.’

Spin, maybe – but in these days of such tumult, the country’s political establishment seems to be taking a rare path in Latin America, indeed in the world of the emerging markets. The president may be beleaguered, with one recent poll putting her approval rating at 8% of the electorate – a record low even in Brazil – but her government is backing the relentless investigation of a corruption scandal that threatens her survival. It’s hard to imagine the leadership in other Brics countries – for example, Russia or South Africa – taking this road.

The scandal revolves around the state oil giant Petrobras and the $3bn Petrobras executives allegedly took as kickbacks for contracts before channeling funds to politicians, including top brass in Rousseff’s ruling Workers Party. The treasurer of that party is heading for jail. The country’s top construction magnate is already behind bars. The speaker of the lower house of congress, a key Rousseff ally until recently, is under investigation for allegedly taking a $5m bribe.

The president herself, who once chaired Petrobras as energy minister, has much to fear – yet she has pledged support for the judicial investigation team heading Operation Lava Jato (Car Wash).

What makes this political storm exceptionally turbulent is the state of the world’s eighth-largest economy. The telltale signs are glaringly obvious, and go well beyond an inflation rate of nearly 10% and unemployment rising rapidly every month.

Two weeks ago, the government projected the economy would shrink 1.8% this year. A week later, it forecast contraction of 1.97% – and this from a leadership that took power at a time of 7.5% annual growth.

Finance Minister Joaquim Levy has insisted austerity is imperative, so spending cuts and tax hikes are planned to help the government return to surplus. Yet a disappointed Levy emerged from another crisis meeting to announce that Brazil is lowering its projection of a primary budget surplus from 1.1% of GDP to a miniscule 0.15%.

And shortly afterwards, the congress passed wage rises for public servants and the police, adding $R2.5bn ($700m) to Levy’s budget, a hefty chunk of what he’d saved. ‘Everyone is in charge, and no-one is in charge,’ said one deputy still loyal to the president. ‘The clock is ticking on this presidency, as the economy collapses.’

No wonder the real dropped 2% in a day recently, and is now standing at its lowest value against the dollar in more than 12 years. Little surprise when Moody’s cut Brazil’s investment rating to near-junk status this month, with Standard and Poor’s suggesting Brazil could lose its investment grade by the turn of next year.

In São Paulo, the CEO of one of Brazil’s biggest companies offers the following arithmetic: ‘Brazil needs to grow by 2%, and have a primary budget surplus of 2% of GDP to stabilise its debt ratios and bring back investors. That’s unthinkable in this economic and political climate.’

Yet, despite the financial gloom and political protests, and a scandal that may yet bring down a president, there is surely a bigger picture at work here. In an age when emerging markets are bedeviled by the age-old issue of corruption and the need for greater transparency, President Rousseff is taking the road less travelled towards the truth, come what may – and, it seems, whatever the consequences.

David Smith, OMFIF Advisory Board Member, represented the UN Secretary-General in the Americas 2004–14.

 

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