13/05/2015

BrazilissufferingfromrecessionandscandalFT.com

May4,20154:56pm

Brazilissufferingfromrecessionandscandal

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PresidentRousseffsneweconomicpragmatismfacesagruellingtest

Reuters

BrazilianPresidentDilmaRousseffiscomingunderincreasingpressure

naworldofnearzerointerestrates,howaboutthis?Lastweek,Brazilscentralbank
increaseditsmaininterestrateto13.25percent.The50basispointriseispartofBrazils
effortstoputitshouseinorder.Theeconomyisexpectedtoshrinkby1percentthisyear,
thedeepestrecessionin25yearsunemploymentisrisingwhileinflationisrunningatover
8percentalmosttwicetheofficialtarget,hencetheraterise.Afteryearsoffastgrowth
andeasycredit,Brazilisonitsback.
LatinAmericasbiggesteconomyisalsoreelingfromacorruptionscandalatPetrobras,
believedtobethelargestinnationalhistory.Releaseofthestatecontrolledenergy
companyslongdelayedresultslastmonthestimatedlosses,duetocorruption,ofmorethan
$2bnmuchofthemduetopoliticalkickbacks.Combinedwiththerecession,thishas
savagedPresidentDilmaRousseffsstanding.Eveninaregionofweakleaders,herdismal
approvalratingstandsout.At13percent,itislowereventhanthatofNicolsMaduro,the
presidentofVenezuela.
TherearethreemainreasonsforBrazilsgloom.Chinas
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13/05/2015

BrazilissufferingfromrecessionandscandalFT.com

slowingeconomyhaspuncturedthecommoditypriceboomforcingBrazil,andother
commoditycountriesintheregion,totightentheirbelts.TheprospectofhigherUSinterest
ratesthreatenstosuckinternationalliquidityoutofthecountry.Mostofall,itispayingthe
costofMsRousseffsmistakenfaithduringherfirstterminsocalleddevelopmentalism.
Thisbeliefinstateinterventionincludedartificiallylowinterestrates,fiscalexpansionism,
limitedreturnsforprivateinvestmentinmuchneededinfrastructure,andpetroland
electricitypricesfixedbelowcost.Suchmeasuresweresupposedtoboostgrowth.Instead
theyprovedtoxic.Businessinvestmentcollapsed.InMarch,industryconfidencefelltoits
lowestlevelsince1998.
ThegoodnewsisthatMsRousseffhas,atleastpartly,seentheerrorofherways.Shehas
handedthereinsofeconomicpolicytoJoaquimLevy,ahawkishfinanceminister.The
ChicagotrainedeconomistiscuttingcoststoplugtheholeinBrazilsfiscalaccountsandso
safeguardthecountrysinvestmentgraderating(losingitwouldraisefinancingcostsfor
bothhouseholdsandthegovernment).Theausterityispainful,butthepriceofnotactingis
evenhigher.Somegrowthenhancingreforms,suchasbettertermsininfrastructure
concessions,havebeentabled.Financialmarketsarenolongerinastateofpanic.Therehas
evenbeenaspateoflargeprivateequitydeals.Afteramiserable2015,growthprospectsfor
nextyearlooksomewhatbetter.
MorestrikingishowMsRousseffhasallowedpowertoleachfromherhands.Eachtwistin
thePetrobrasscandalhasseengovernmentalliesintherulingcoalitionerodethegripofthe
executive.ThelowerhouseofCongressisnowcontrolledbyagroupofregionalbarons,the
BrazilianDemocraticMovementparty(PMDB).AnotherPMDBchieftainisheadofthe
Senate.LastmonthMsRousseffhandedoverthejobofpoliticalcoordinationtoMichel
Temer,thePMDBleaderandhervicepresident.
Worryingly,allthiscomesastheisolatedMsRoussefffacesanotherfouryearsinoffice.For
now,economicpragmatismprevails.Butitisanopenquestionifshewillbeabletostickto
theneworthodoxy,especiallyifrecessiondeepens.ThePetrobrasscandal,pursuedbyan
independentjudiciary,maylapclosertothepresidency.Socialprotestisrising.Onethingis
clear:therestofMsRousseffstermwillbegruellingindeed.
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Brazil economy, Central Banks, Central bank intervention

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THEFINANCIALTIMESLTD2015FTandFinancialTimesaretrademarksofTheFinancialTimes
Ltd.
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BrazilissufferingfromrecessionandscandalFT.com

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