Brazil: To the Bottom and No Bounce?

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Has Brazil hit bottom and will there be a bounce? As the country continues to witness, almost every week, there are more arrests related to the Car Wash scandal (multi-billion dollars in bribes at the Petrobras mainly from contractors with kick backs to politicians). The economy keeps shrinking, Congress fails to act and so the initial answer to whether there will be a bottom bounce seems to be a resounding “Nao”.

Things will get worse before they get better. Dilma still has three years left in her term and the chances of her impeachment are no greater than 50 percent. She can maintain her inertia and yet maneuver legally to run out the clock on a possible “coup”. While she has a shrunken and unfaithful bunch in Congress, she is favored by the lack of any clear successor. Moreover, the mess that the country now faces requires more than the change of the person at the top. So muddling resolves nothing for business and public administration, but it is probably better, under the circumstances, than an institutionally creative rupture; something an impeachment most certainly would be.

Still, I think that we are almost to the point where the country will stop digging a deeper hole for itself. Here are some reasons why:

1) The economy is cyclical in nature and after two straight years of unprecedented recession, an upswing will take place probably in the second half of 2016. Prices have fallen substantially in US dollar terms and foreign investors – one is tempted to say speculators – are taking a longer view for possible opportunities. Also, the strong dollar has strengthened some traditional semi-finished goods producers. An example here is Brazil’s cellulose pulp sector where investments and exports continue to find room for expansion

2) The political corruption legal mess is already resulting in a much needed house cleaning. The current harvest of plea bargains is moving from the construction conglomerate sector to finance. The arrest of Andre Esteves of BTG Pactual (the country’s most important deal making investment bank) is a major step in this direction. Moreover, Esteves’ arrest touches back to dealings in the Tucano administration that preceded Lula/Dilma and begins to show some equanimity in Brazil’s police and justice system. And finally, high-level politicians are following the business elite to jail as never before in Brazilian history.

3) Much of the current political morality crisis reaches back to the Mensalao scandal (cash for votes in Congress) of almost 10 years ago and shows not only the persistence and consistency of the prosecutors but also the breadth and depth of the corruption in Brazil’s political and administrative system. Having exposed the problem and even prosecuted the elite is at least a first and unprecedented step in creating solutions. While Brazil’s civil society is weak and lacks depth due, in large part, to the precarious state of the country’s educational system, people in grass roots organizations are making their voices heard, if only gradually.

4) 2016 is the year the Olympics come to Brazil and Rio will receive 200 thousand visitors from the USA alone. These visitors will bring money to spend but they will also force the Brazilian government to at least temporarily bandage and address issues such as urban improvements, public security and transportation. This also helps Dilma as the appetite for impeachment will be lessened as Brazil is more and more in the international spotlight for something positive and fun.

5) The focus on Brazil brought by the games will also heighten Brazil’s campaign to address the environment. The Mariana mine disaster (a ruptured dam holding mining tailing, described as Brazil’s largest environmental accident ever) leaves a legacy in that it draws attention to wider issues such as the ongoing clear cutting of the Amazon, the negative impacts of large dams, urban sanitation and public health, and pollution of Brazil’s riparian and coastal systems.

6) Brazil still has a U.S. $2 trillion-plus economy and while there is a risk of it falling out of the top 10 in the world, it is powerful and laden with potential. Numerous niches for growth exist. Investments in Brazil’s higher education system or in its cosmetic and beauty industry are often mentioned but traditional manufacturing, while not growing, seems to have at least stopped its decline and exporters are seeking to take advantage of being more competitive with the dollar at around 4 reais. Perhaps Brazil’s stated reserves of 350 billion might be used to help stop the recession from turning into a full blown lost decade of economic depression such as was the case in the hyperinflationary 1980’s.

Possible progress in all of these areas is of course only possible if Brazil can get its political house in order. This is a sine qua non for rebalancing the economy. It is almost impossible to shrink the size and predominance of Brazil’s public sector and the only alternative is for the relative growth of the private sector. This is already happening as average Brazilians gradually recognize that the paternalistic state no longer can offer enough sinecures. Already, millennials and other younger generations are striving to survive by creating their own businesses and opportunities. This is not easy given the weight of the bureaucracy, but still it may not be impossible.

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