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Analysis
'The prosecutors are unstoppable'

'The prosecutors are unstoppable'

Brazil's crisis – a boon for investors

by David Smith in Buenos Aires

Tue 15 Mar 2016

Events this month in Brasilia and on the Sao Paulo stock market constitute an extraordinary narrative. Investors are seeking opportunity in the most unlikely places.

Early on 4 March, Luis Inacio Lula da Silva, the former president, was briefly arrested as part of the corruption investigation into state oil giant Petrobras. Within hours, the Bovespa stock index in Sao Paulo was up 5% and the real had reversed months of decline against the dollar.

So far this year, the stock market has soared 25% and the currency is 10% higher. This is despite Brazil's worst recession in a century – with a fiscal deficit of almost 11% of GDP, double-digit inflation, and the major agencies having downgraded the country’s sovereign credit ratings to junk status. And President Dilma Rousseff, Lula da Silva’s handpicked successor, is facing impeachment.

‘It’s all down to the fact that the markets want to believe Rousseff will fall now, inevitably, and that we will have a new government to confront the economic crisis,’ according to one of Sao Paulo’s leading bankers.

The Petrobras scandal has already brought down figures who were once untouchable. Just last week the country’s leading construction magnate, billionaire Marcelo Odebrecht, was sentenced to 19 years in prison for corruption and money-laundering.

Prosecutors are seeking house arrest for Lula da Silva, who stands accused of receiving R$30m ($8m) from Petrobras builders who worked on his home, and lying about a beachfront house he allegedly owns. Joao Santana, who masterminded the presidential campaigns of Lula da Silva and Rousseff, is also under arrest, and talking. This raises the prospect of this scandal going all the way to the top.

‘The good news is that no one in power seems to have the power to stop this investigation,’ says one opposition leader. ‘For Latin America, and the battle against corruption, this scandal and this investigation is breaking new ground. The prosecutors are unstoppable.’

However, the political reality is that, in any battle to bring down the government, the president and her predecessor have strong cards. Impeachment requires two-thirds of Congress to vote in favour. Despite defections, Rousseff and Lula da Silva are likely to have the votes in the short term if they have the will to fight.

And that means economic policy, for fear of alienating the ruling Workers' party’s base, will not address some of Brazil's underlying problems. These include a soaring fiscal deficit, wage rises that fuel inflation, and social programmes such as the bolsa familiar (family subsidy) that more than 40% of the population receives.

Leading players elsewhere in Latin America are drawing lessons from Brazil’s problems. In Argentina, where the new centre-right government of President Mauricio Macri is confronting the economic woes of inflation, deficit, and debt, the response has been to view Brazil’s predicament as a learning experience.

‘Brazil had so many good years, of growth and investment, of commodity boom, but they didn’t confront the garbage down below – corruption, lack of infrastructure, overregulation,’ according to one of Macri’s key advisers. ‘We have to learn from their experience, apply the lessons, even as we suffer, because Brazil is our No.1 market.’

This past weekend, Brazil has been consumed by images of hundreds of thousands of people marching in protest against the government, in almost every major city. There lies the ultimate variable in Brazil’s remarkable narrative of crisis, scandal and possible recovery.

David Smith, OMFIF Advisory Board member, represented the UN Secretary-General in the Americas between 2004 and 2014.

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