LONDON: 2016 started off with popular demonstrations and panelaços (saucepan banging) against leftist President Dilma Rousseff, of the PT party. The bad economy, the emerging bribery scandal involving Petrobras and her government’s illegal attempts to cover up the public spending deficits, turned popular opinion against her. Before the year end, Rousseff was impeached, the leader of her PT party in the Senate was in jail, as were the President of the Chamber of Deputies, her Finance Minister (subsequently released pending trial), two former governors of the state of Rio de Janeiro (one was released), a half dozen other congressmen, the former Finance Minister, the former treasurer of the PT party and dozens of executives from Petrobras and large construction companies, plus several lobbyists and facilitators of the bribes. Former President Lula, whose left-wing party was swept into office in 2002 and who vowed to keep the PT party in power for 20 years, was under 5 federal indictments and was picked up by the police at dawn one morning and forcibly taken to testify in respect of one of the cases; quite a comedown for the President who had been called “the man”by an admiring Barack Obama. The most important minister in Lula’s cabinet and one of the founders of the PT party, Jose Dirceu, was condemned to 23 years in jail, having already been condemned in a 2005 bribery scandal. Later it was revealed that US authorities were investigating the events surrounding the Petrobras scandal, as its shares (ADRs) are also traded in US. Many disgruntled US investors have initiated lawsuits against Petrobras there. Upon the impeachment of Rousseff, Vice-President Michel Temer of the PMDB party became President of Brazil, as mandated by the Brazilian constitution.
Economically, 2016 was not a good year for Brazil. The country registered its tenth consecutive quarterly decline in GNP and its 22nd consecutive month of falling employment. Inflation ended the year at 6.4% (almost 10% by some measures). After years of loose fiscal policy and of embracing leftist economic theories which encouraged government spending, many of Brazil’s states and cities find themselves insolvent and unable to pay the salaries of essential services such as hospital staff and police forces.
President Michel Temer has vowed to address the fiscal imbalance he inherited from Rousseff and is passing legislation to limit government spending at the federal level. He is also beginning the arduous and perhaps impossible task of reforming the gigantic state pension system, for which he has controversially proposed legislation which does not affect politicians and the military, where it can be argued that the largest distortions exist. At the federal, state, and municipal level the country is caught in a descending spiral of falling revenues, to a large extent fixed outlays, and unbearable levels of debt. On the positive side, the Sao Paulo stock exchange returned the best performance in the world, the Brazilian Real went up by 22% against the US$. The stock market was seen by investors as an opportunity to take advantage of the regime change and an end to the policies of Rousseff. The Real came under less pressure as the weak economy put the brakes on imports and the government passed legislation allowing the repatriation of undeclared funds held overseas.
The legacy of the Olympics for the city of Rio was positive, new tunnels, bridges, highways, trains, airport terminals and other improvements have made the city a much better place to live.
Given this backdrop, what can be expected in 2017?
The Petrobras scandal will continue, politicians and businessmen already caught up in the net of scandal are negotiating plea bargaining deals whereby their sentences are reduced in exchange for giving information on other participants in the scandal, several hundred of these plea bargaining testimonies are about to be accepted by the justice system. There are indications that a large percentage of the political class in Brazil will be implicated. It is possible that the Electoral Tribunal will be presented with evidence which proves that dirty money was used to fund the campaign which elected Roussef, her vice-president and the current president, Michel Temer. If this is the case then the tribunal will probably annul the result of the previous election and call for a new election for president, which according to the constitution will be an election by the members of Congress, not by popular vote. There is already a case before the Supreme Court arguing for an election by popular vote. All this adds up to political uncertainty, which is bad for the economy. Some people argue that it would be best to leave Temer as President until the next elections in 2018. As an intelligent and smart political operator, with good advisors, he has nothing to gain except by doing what is best for the country. Others see his ascension to the presidency as a “coup”by the Congress which was designed to ring-fence the reach of Petrobras around Roussef and her entourage, to save everybody not already caught in the net. If this was the case, then the “coup” succeeded in removing Roussef but failed in its attempt to ring-fence Petrobras as the heroic Judge Sergio Moro and the federal prosecutors continue in their herculean task.
Brazil’s economy will continue to stumble along, with estimates ranging around 0% growth. Inflation should continue low, within the government’s target of 4.85%, helped by weak internal demand and the stronger Real. Unemployment, which is the real tragedy in this equation, is predicted to rise until at least June, reaching almost 14%, which will have predictable effects on life in the big cities and street crime.
Political uncertainty, fiscal tightening, economic weakness and high unemployment look sure for 2017; however what this crisis has shown is that Brazil’s institutions are working. The federal judge in charge of Petrobras, Sergio Moro, Brazil’s new hero, has managed to keep going despite a formidable array of forces lined up against him. As have the federal prosecutors and police forces. If Brazil’s institutions remain intact there is hope that the country can rebuild itself and provide a good environment for its hard working and infinitely patient citizens. In the medium term the work ethic and strong ambition which is characteristic of Brazil’s citizens will define the results. As the saying goes “Brazil grows at night, when the politicians are sleeping”.
Jeffrey Brantly is Brazilian, has degrees from the University of Virginia and Harvard Business School, and worked in an investment firm in Rio de Janeiro for 32 years