What if...
April 14, 2015

Untitled Document

The second term of President Roussef turned out well?

Brazil is in turmoil since the end of last year and the national mood is down as is the economy: people are cranky and pessimistic, the economic indicators are deteriorating, inflation is up and so is unemployment. Adding insult to injury, there is a new scandal, this time involving Petrobras, a symbol of national pride. So, who, in good conscience, would consider the possibility of a successful second term for Roussef?

First off, success in this case, has a very limited meaning: basically we should all be happy if there is no collapse, if democracy and institutions are preserved.

The country faces a crisis without parallel in its recent history: we have an economic crisis, a political crisis, both accompanied by loss of confidence and credibility. In this scenario, the ability to restore confidence and credibility is already a victory, and it is a condition for the economic agents to make decisions. We should celebrate if the economy grows at 1% in 2016- given the fact that 2015 is lost already and there will be a recession. If the government is able to keep inflation on target without a significant increase on interest rate that is also could be considered a win. In other words, giving what we are looking at, anything is positive, anything is a gain.

Dilma Roussef will remain as President as there is no legal basis for impeachment and leaving office is not in her plans. Those who have been going to the streets to protest against the government and ask for her to leave will have to accept the result of the general election and hope for a better luck in 2018.

I don’t want to get into the politics of the crisis because in Brazil anything is possible: political leaders do not have conviction and coalitions are made not for the greater good but to be in power, keep the power and preferably benefit from power. The political crisis will be resolved as it has always been, on a quid pro quod basis. How much that is going to cost is another problem but history has shown that at the end, all politicians gain something and give something in return.

The next 2 months will be decisive as Congress will vote the fiscal adjustment proposed by the Ministry of Finance and Petrobras will publish its balance (now scheduled for April 22snd) ;those two events plus the progress of the “car-wash” operation will define the next years the government Dilma. The first two events - fiscal adjustment and Petrobras results - for its economic impact, the last by the impact on trust and credibility.

The measures proposed by the Minister of Finance are necessary but not enough to assure fiscal equilibrium. The proposals will only revert measures of fiscal stimulus made in the past either to promote growth or to gain support for the government. There is no structural reforms and as the Government publicize – as if it was a good thing- doesn’t affect the social programs. The Minister is already hedging, saying that the Government might take additional steps if fiscal revenue remains below target. What that means is the government will not have any room to execute anti cyclical policies. With growing inflation, monetary policy is not an option also. So economic growth will be a challenge in a context of low world economic growth and without stimulus.

It is worthy to remember that the average economic growth for Brazil in the last 20 years is about 3%, with the exception of the second term of Lula, when the growth observed in 2010 increased the average. Those were years of boom in the whole world and there was a tide that made all economies grow, but that tide didn’t affected Brazil in the same way it affected other economies: in 6 out of 11 years (from 2000 to 2011), Brazil grew less that other Latin American countries and grew less than Peru, for instance, in all years except for 2010.

In other words, if on a time of international favorable conditions and with fiscal and monetary policy, the country grew at 3%, what would happen when none of those conditions are present?

Regarding Petrobras, the focus of discussion has been the impact of car wash operation: for the American reader, for example, all problems in Brazil come down to Petrobras. In a way, this is truth: the outcome of investigations and prosecutions of car wash are fundamental to recover - or not- the credibility of the country, for Brazilians and for foreigners. If the result of the “mensalão” serve as parameter of what can happen with Petrolão , we have to be prepared for another disappointment.

The “Petrolão” surpasses the “mensalão”: the numbers of the mensalão were big and there were many people involved. Petrolão brought everything to a whole new level: it is not only the fact that public funds were used to finance political campaign or enrich politicians. In this case Petrobras was almost destroyed and have lost more than 60% of its market value since September 2014. Let’s not forget that this comes on top of the loss that occurred since 2008 due to the PT policy for the company. There is also a destruction of the GDP of the country since Petrobras answers for around 10% of the GDP. There was a loss for investors, foreigner and domestic. Amongst those, let’s remember the workers that had invested part of their FGTS in Petrobras shares, thinking that would be a good investment. Those workers are probably registering a 90% loss. There is also the impact on construction companies, one of them already filed for bankruptcy, risking the continuity of infra-structure investments in Brazil. So, the Petrolão is not only an illegal scheme to enrich people as mensalão, redistribute money if you will. What was done had an impact in the wealth of the country.

Petrobras already has his own troubles as a company. Due to the regulation for the extraction of the pre salt stablished by the PT, the company has worked below its potential for production. It was only in 2014 that production start to increase; in fact the increase was of 5%, after 2 years of declining production. Notwithstanding the increase in production earnings have been below expectation. Earnings per share were between 20% and 32% below estimates in 2014. The company has negative cash flow and every year, in the beginning of the year, taps the market for financing. That is why the publication of audit results is so important (now announced for April 22nsd): not only to guarantee its access to financing but to avoid a series of negative events, with impact in the investment grade of the country.

Therefore, the vote on the fiscal adjustment (if favorable, which probably will be) and the release of the balance of Petrobras, will bring a " relief " for the government Dilma but the challenge to control inflation and recover growth will remain untouched .As for the results of the car wash we will have to wait few years until we know the results.

So my conclusion it is possible that Dilma succeeds, meaning, avoid chaos. But it is also terrifying because it implies that in the absence of other leaders, the PT will remain in power.

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