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Brazil, we can only pray (or hope)
October 27, 2015

Untitled Document

There are two questions that people ask me these days: the first one is … what is going on with Brazil? The second is that if the US is going into a recession. When you are doing small talk, over a glass of wine, is very difficult to give a good answer to any of those questions and sometimes even when if you have a lot of time it is hard.

The short answer for Brazil, and this is not an original opinion but one that I share with the majority of economists and people that have common sense is that the mix of wrong economic policy and corruption brought us where we are. We could include complacency in the mix in order to emphasize that we didn’t use the good times of the commodities boom to do the investments and reforms needed. I do not want to spend time on corruption because that is what the newspapers are doing every day but I’d like to make a remark about the economic costs of corruption. To better understand my point, I want to go back to the so called “mensalão”: although awful, it didn’t have the same effect in the economy because the numbers were much smaller and it was a “transaction” between different politicians using public funds but not in the scale we are seeing now. The Lava Jato, as the corruption in Petrobras is called, is a whole different animal. It has caused the destruction (almost) of one of the biggest international companies in the oil sector; it has demoralized the company and the government. Petrobras investments are responsible for approximately 1.8% of the GDP and the company has a direct impact on the economy but also impacts other sectors. Finally ,and I have mentioned this in previous newsletters, there was a loss of wealth for investors in the company and let’s remember that investors are not only the big investors or institutional investors but also small investors, Brazilian individuals and families that once believed ( proudly) that they were participating in the growth of a great company. There is also the thousands of employees that opt to invest their FGTS (meaning their retirement) on Petrobras shares. The damage caused by Petrobras is enormous because not only we can put it in numbers but also for its impact in the confidence and credibility.

As for bad economic policy, I have also written about it in previous newsletters and many economists have talked about it, so I will just summarize: Dilma’s first mandate started in 2011 and as the years passed we noted a mixed of

a) increasing interventionism,
b) lack of perception that the economic model that have sustained Brazilian growth in the previous decade had come to an end
c) The two previous items combined with the insistence in expanding social policies in a less benign environment, led to a stagnant economy.

I believe that here resides one distinction amongst economists and the economists from PT. The Brazilian problems, contrary to Lula’s and PT’s latest comments started way before 2015, way before Minister Levy was catapulted to the status of villain number 1. The current crisis is not, as some want to argue- provoked by Levy’s economic policy. His policy is the remedy and if implemented successfully we might have a chance to recover in a couple of years. If not, if he doesn’t succeed we are doomed. There is no miracle, no divine force that will make the economy get better without decisive and painful action.

When public officials come to NY and make presentations with nice colored graphs and charts, they all point to the fact that the situation is not so bad, that Brazil will not going to default, that we have a big amount of reserves, that the exchange rate is doing its part in the adjustment of the trade balance and the current account and so on and so forth. That is their job, to show the good side of the bad numbers. I actually agree that Brazil is not going in a downside spiral, I agree that somehow the situation is under control. The problem is that the situation is so unstable and fragile that any mishap can lead to a disaster. Another problem is how long we are going to stay in this state of paralysis, a state where nobody makes investments decisions, nobody sell, and nobody buys. Of course life goes on and people are going to work every day and going to super markets and sending their kids to school and Brazil will not disappear. The problem is that in the meantime we are shrinking, the economy is shrinking. We are living a battle between the Congress, the Government, and the Ministry of Finance since the beginning of the year and now the PT establishment and Lula decide to add to the already congested field in disarray. The more they disagree, the further expectations deteriorate.

The inevitable question that follows is what is the result, what will happen. For a while I thought that the only solution would be with Dilma’s resignation as I don’t believe there are grounds for impeachment. If she resigned maybe, only maybe, Michel Temer could organize a credible new government, restoring confidence and so, investments. She will not resign and will not be impeached. Furthermore, lately, with the speeches and actions taken by former President Lula and the PT establishment, I started to think that even her resignation would not bring good results as the PT would not help a coalition government. Next year there are municipal elections and that is why Lula and the PT establishment are going after Levy and Dilma: they are afraid that the necessary fiscal adjustment will jeopardize the chances of the party in the elections and PT will lose ground. What they do not to realize is that the deterioration of the economic conditions already did that.

It seems to me that there is no good solution in the short term. We just have to wait out and pray that Levy stays in the government and no other scandal come to light.

As for the second question, about the state of the US economy I will leave for part 2 ( coming soon). Also, take a look on my blog. (http://www.zeliacardosodemello.org/).

 

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