Brazil Economy: Further Deterioration

The longer the current government of President Dilma Rousseff remains in power, the more downhill the country will go, some experts say. (Photo: Ichiro Guerra/PR)

Brazil’s economy will get worse before it can recover, experts say.

Inter-American Dialogue

Brazil’s gross domestic product shrank 4.5 percent year-on-year in the third quarter, the government’s statistics institute announced Dec. 1, putting Latin America’s largest economy on track for its worst recession since the Great Depression. At the same time that lower commodity prices are taking a toll on the economy, the widening Petrobras corruption scandal and the beginning of impeachment proceedings against President Dilma Rousseff have consumed Congress and paralyzed key segments of the business sector. How much worse will Brazil’s economic situation get before it improves? Is there any hope that Congress will pass reforms needed to get the economy back on track? What changes would help to turn around Brazil’s economy, and are they likely to happen any time soon?

Jonas Rama, market intelligence and business development consultant at Barral M Jorge & Associates: Any substantial short-term improvement to Brazil’s economic situation is unlikely to happen due to the country’s acute political crisis. Three recent events have added to the executive paralysis that has been taking place: The arrest of the ruling’s party leader in the Senate, Delcidio do Amaral; the impeachment proceedings against President Rousseff, and; a letter from Vice President Michel Temer saying that the president lacks confidence in him and his party, the PMDB. These events add to an already complex scenario. The difficult fiscal cuts negotiation in Congress became even more troublesome with Amaral’s arrest. All of the executive branch’s political influence in Congress will be focused on preventing Rousseff’s impeachment. However, the letter indicates a possible break-up of the PMDB and the ruling Workers’ Party (PT) at a crucial moment as the PT lacks enough congressional support to halt the impeachment. Markets reacted favorably to the start of the impeachment proceedings, which, in itself, may signal that the economy may be at a standstill until the impeachment effort plays out, with little or no chance of any significant reforms put in place until then. There is little doubt that economic recovery would take place soon if Rousseff were to leave office. The reason for that is PMDB’s ‘Bridge to the Future,’ also known as ‘Temer’s proposal,’ a document released in late October that puts forward a series of orthodox reforms necessary to resume economic growth. However, despite those sound economic proposals, it is unclear whether or not Temer and his co-partisans such as the Senate and Chamber of Deputies presidents, Renan Calheiros and Eduardo Cunha respectively, can hold power, having themselves been investigated in the Petrobras corruption scandal. If from a strict market/economic standpoint, Rousseff ‘s impeachment may seem positive, it becomes much murkier from a political one. Brazil’s political institutions may collapse with a succession of short-termed presidents. There is no silver-bullet solution for Brazil’s economic crisis, which will worsen in next year’s first quarter. The saying ‘time heals all wounds’ will be put to test in Brazil. 

Gary Hufbauer, senior fellow at the Peterson Institute for International Economics: To recall Karl Marx, things have to get worse before they get better. When a country has inflation of more than 10 percent, an economy that is shrinking by more than 4 percent, double-digit unemployment, a primary fiscal deficit of more than 3 percent, and a policy interest rate exceeding 14 percent, you know there’s trouble in the macro-economic kitchen. But Brazilians, alas, must suffer more economic pain before they are prepared to take the politically necessary step of slashing public expenditure and cutting deep into entitlements of all kinds—government salaries, pensions, social welfare and more. At some point, hopefully next year, the present cast of leading politicians will head into retirement and new hands will guide the ship of state. 

Thomas Rideg, regional CEO for the Americas at M-Brain: The longer the current government remains in power, the more downhill the country will go. The next presidential election is in three years, so the first huge step for recovery is to force the Workers’ Party (PT) out. Things seem to be going in that direction. Though this will likely provoke an increase in short-term turbulence and speculation, it will be a huge sign of change. The most critical next step is to establish some political trust and consequently pick up some economic progress. At this point, the already desperate demands from the local and international community will be higher than ever, and the reforms will begin to take place. Once this trust is established, foreign direct investment will pick up again. All this will transform into a positive and gradual snowball effect of confidence that will start an economic recovery. Of much more importance than the scrutiny of the international community is the reality that local citizens are living. Brazilians are becoming poorer. With the economy shrinking at around 3 percent and inflation estimated at above 10 percent in December, people are paying a lot more money to receive a lot less in return. The situation is unsustainable and is affecting every social economic layer, which means that everyone is going through a change in lifestyle. Added to the list of wounds Brazilians have faced is the mining disaster in Minas Gerais, a slowly recovering energy crisis and even a mosquito epidemic. It has definitely been a year (or a couple of years) of bruises, and though 2016 will not be a year of miraculous recovery, it should be a year of a beginning of a new era of democracy that should bring tangible effects of recovery in mid-2017. Again—if and only if the PT is replaced. The one thing that people have increased access to is the Internet, which exposes them to the way true democracies work in some other countries. This exposure in contrast to Brazil’s reality will keep shrinking the PT’s credibility, meaning that change is certain to occur.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

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