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reflections

Dec 2, 2015 | 01:55 GMT

4 mins read

Brazil's Economic Troubles Defy Easy Solutions

(Stratfor)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

Brazil's economy contracted by 4.5 percent in the third quarter of 2015 compared with the previous year, according to data from the Brazilian Institute of Geography and Statistics. The figure further emphasizes the scale of Brazil's historic economic recession.

Brazil traditionally has faced slow and uneven economic growth as a result of boom-and-bust cycles, high transit costs and pervasive inflation. Now, the country has entered its worst recession in a generation. The bad news for the governing Workers' Party is that there is no quick solution to Brazil's ailments, most of which are a result of economic and political factors beyond the administration's control.

A confluence of factors will continue to make 2016 one of Brazil's worst years for economic performance in decades. The corruption scandal at state-owned energy firm Petroleo Brasileiro (better known by its Portuguese acronym, Petrobras) unearthed in 2014 has had repercussions throughout Brazil's financial and construction sectors. Government lenders have increased scrutiny on loans to construction companies involved in the scandal, and delays in funding caused by ongoing criminal investigations have left some firms on the brink of bankruptcy and have caused mass delays and firings across the oil sector's supply chain.

Meanwhile, economic boom has turned to bust as a multiyear steady downturn in global commodity prices has eroded the value of Brazilian exports by 13 percent in just three years. To the south, Argentina's declining economy has cut into Brazilian exports, particularly in the automotive sector. A strengthening dollar has spurred capital outflows from Brazil over the past several years. And political uncertainty from ongoing attempts to impeach the president will remain into the new year.

What is Brasilia's escape from such dismal prospects? For the government of President Dilma Rousseff, a key goal is to fend off major challenges ahead of the 2018 presidential election. But economic decline will weigh down its prospects, and the Workers' Party is unlikely to make it to the 2018 vote without a major drop in voter support. Rousseff herself has a very low public approval rating: Barely 10 percent of voters now rate her government favorably. Unemployment has also surged to nearly 9 percent from 4.8 percent last year. To make matters worse, the party's major congressional ally, the Democratic Movement Party of Brazil, is poised to run its own candidate in 2018, giving rise to the possibility of a tough three-way race.

But although larger economic forces will ultimately determine the timing and nature of Brazil's economic recovery, the short term will be marked by instability caused by individuals and political parties. The persistent threat of impeachment will continue into 2016, although the opposition coalition pushing for it will struggle to obtain the necessary votes to impeach Rousseff unless the political climate significantly shifts against her. In late 2015, Rousseff's party extracted a promise of loyalty from a faction of the Democratic Movement Party led by Vice President Michel Temer, which will likely be enough to offset impeachment votes from political opponents.

But unresolved criminal charges against Eduardo Cunha, the Democratic Movement Party president of the lower house of congress, will probably be a catalyst for further threats of impeachment in 2016. Cunha has the power to allow impeachment requests to make it to the floor of the congress and could allow an impeachment vote (even if it is unlikely to succeed) if he is on the verge of being removed as part of an effort to prosecute him. Potential testimony by government and private sector officials arrested for their alleged roles in the Petrobras scandal may also keep the impeachment threat alive.

Over the next few years, Brasilia will try to strike a balance between spurring economic growth and containing the negative effects of the economic downturn. The government will try to find new export markets for non-commodity exports, particularly Brazil's increasingly competitive manufactured goods. But the regulations of the Common Market of the South will leave some lucrative trade deals — like a pending agreement with the European Union — temporarily out of reach. Brasilia will also probably try to spur the domestic economy by reducing Brazil's considerable interest rates, albeit at the expense of driving inflation beyond the central bank's targets. The near future will not be kind to Brazil, with global investors remaining wary of it and the domestic economy remaining slow. But Brazil's relatively strong domestic manufacturing base and the sheer size of its economy will allow it to endure the shifting political and economic currents in Latin America until the next commodity boom. The current downturn in fact might give Brazil the necessary incentive to diversify and enact institutional changes to begin the long process of moving away from a commodity-dominated export economy.

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