March 22, 2015 7:00 pm
Brazil’s fall from grace of its own making
The important question now is whether its institutions continue to hold
Brazil is in crisis. Earlier this month, more than 1m protesters took to the streets to voice their discontent. Much of the country suffers water rationing following a long drought. Petrobras is engulfed in an epic corruption scandal that saw up to $10bn embezzled from the oil company. The economy is likely to shrink this year and perhaps next year as well, which would be its worst performance since 1931. Approval ratings for Dilma Rousseff, the president, have slid to 13 per cent, the lowest on record. It seems only yesterday that the country was feted as the new best thing. So its fall from grace has been spectacular. Sadly, the situation is likely to get worse still. The central question is whether Brazil’s institutions hold as it does.
A large part of the blame lies with Brazil itself. For much of the 2000s, it enjoyed an unprecedented commodity boom. This bolstered its terms of trade, swelled government revenues, boosted domestic wages and propelled a domestic credit boom. When investors clamoured to buy into Petrobras’s 2010 $70bn equity offering — the world’s largest — Brazil really did seem to be o melhor país do mundo, the best country in the world. In reality, it was riding the steroid fix of a credit boom in which Brazil reaped the benefits of globalisation without any of its disciplines. Now the process is going into reverse.
The collapse in the currency, down almost a third against the dollar in just six months, is a dramatic repricing of the economy. But the trade-weighted real exchange rate, which adjusts for inflation, is still higher than its 20-year average. Unit labour costs are also higher, in dollar terms, than in 2010. So the currency is likely to weaken more.
Interest rates have been increased. That is partly to quell inflation, a side-effect of the weaker currency. But interest rates have also had to rise to compensate foreign investors for higher country risk — and Brazil needs foreign capital to fund its current account and fiscal deficits. On the domestic side, though, higher rates will hurt indebted Brazilians, adding to the squeeze from the needed austerity plan put in place by Joaquim Levy, the finance minister.
The discipline of globalisation is being felt in other ways too. US market probes into Petrobras added impetus to a local corruption investigation that has led to 103 indictments and a Supreme Court investigation into more than 30 sitting politicians. Ms Rousseff, chairwoman of Petrobras before she became president, has so far been spared. But calls for her impeachment, while ultimately unlikely, are rising.
The government, in power for 12 years, has blamed external factors. But the mess is largely of Brazil’s own making. For a counterfactual, one only has to look at the more market-orientated Pacific Rim countries of Chile, Colombia and Peru. They enjoyed similar commodity and credit booms but without the same hangovers. Their economies are still growing fast.
All is not entirely bad for Brazil, though. The country is a long way from falling back into its hyperinflationary ways of old. Better still its institutions are holding, especially the judiciary. Last year, prosecution of the mensalão vote-buying scandal saw several high-level politicians convicted. Now others are in the dock over the Petrobras scandal too. Separately, Eike Batista, a former billionaire accused of insider trading, may go to jail. This would have been unthinkable a few years ago, when impunity reigned.
So Brazil’s crisis is bad and will probably get worse before it gets better. Yet it could have been worse still. That is progress, of sorts, for “the country of the future”, as the cliché goes. Most of all, it means that Brazil still has one.
Copyright The Financial Times Limited 2015.