Brazil Political Drama Part Dois


Charles Wilson, PhD

Markets cheer push to impeach Dilma, but the rallies strike us as premature.


Since we last wrote about Brazil, its political and economic troubles have continued to unfold in dramatic fashion. In late November, a prominent local businessmen, Andre Esteves, was arrested, proving once again that Operation Car Wash, which has uncovered billions of dollars in illicit kickbacks, knows no bounds. His preemptive arrest enables the prosecutor to build his case while Esteves is held in custody, a peculiar arrangement specific to Brazilian prosecutorial law. The recent events have lead to a disruption of the meta-stable equilibrium in the country’s political house of cards. The charges against Esteves initially focused on obstruction of justice related to possible witness tampering, and at first seemed isolated to Esteves, with no connection to the bank. But then wire transfers were discovered from the bank to a familiar face in the ongoing drama, Eduardo Cunha, the Speaker of the lower house of Brazil’s Congress. He has been the target of an ongoing investigation related to multiple alleged bribes discovered in Operation Car Wash. Cunha had allegedly used his influence as Speaker to delay the impeachment proceedings against President Dilma Rousseff in a presumed effort to save himself from prosecution by striking an awkward deal with Rousseff’s party, even though they were political adversaries. With the new charges, he returned to his fellow opposition party members for support, which compelled him to push forward the impeachment proceedings involving alleged fiscal malfeasance.

I was in Brazil last week, when the release of third-quarter gross domestic product (GDP) data revealed a greater-than-expected 1.7% quarterly and 4.5% annual contraction that compounded declines in the previous two quarters. Some pundits are now speaking of an economic “depression” in Latin America’s biggest economy. I queried a wide array of business leaders, policy makers, economists and analysts about Brazil’s political and economic plight. Markets celebrated the potential end to political uncertainty, with Brazilian stocks jumping and the currency gaining against the dollar. But there’s significant cause for caution. Dilma’s popular support has fallen precipitously over the last 18 months, but so has broader support for the government in general, diluting a popular push for impeachment. Secondly, the strength of the governing Workers Party (PT) in the lower house means it can likely block or at least slow impeachment proceedings in a bid to run out the clock on her second term, which ends in 2018. The recent developments in many ways lead us back to square one--political paralysis, which we fear is the worst possible outcome. Brazil still faces rising unemployment and inflation, a benchmark interest rate at a towering 14.25%, shrinking investment and household spending, downward revisions to GDP decline estimates, likely additional sovereign credit rating downgrades, and further downside to the currency. Meanwhile, the urgency of fiscal adjustments is running up against the increasing difficulty in the consensus building necessary to tackle it and all the other economic challenges. We need more clarity about Brazil’s path forward before we can become optimistic about the outlook, so the recent rallies in Brazilian securities look premature to us.

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