Brazil: Predictions for 2016

For several years now, I have risked annual predictions about Brazil. Some have been more prescient than others. They are offered with little pretense and as a personal reflection based upon feeling, experience, intuition and my interpretation of the facts.

It is well known that 2015 was a difficult year for Brazil. But the country hasn’t fallen off the map. And while 2016 will be at least as difficult, I expect improvements in the economy and general atmosphere by year’s end.

First off, Dilma will not be impeached as president in 2016.

On the other hand – and this is somewhat bold – Eduardo Cunha will be pushed out as president of the Chamber of Deputies. Renan Calheiros – president of the Senate – will survive only because he has done so in the past and is somewhat more discrete than Cunha. Furthermore, Renan and Dilma need each other.

The economy will shrink less in 2016 than it did in 2015. The current recession took 3 percent plus from the GDP in 2015. Dilma, with Lula’s support and new Finance Minister Barbosa’s agreement, will attempt to spend enough to stimulate the economy. The post Keynesian stimulus will fall short and the negative consequence will be inflation matching or exceeding the 10 plus percent of 2015. As in the rest of the world, those hurt most by inflation will be the poor, those on fixed income, and the new middle class (because of higher finance charges) and it will also worsen the political climate. In the worse case scenario, a lack of growth together with inflation will lead to more populist appeals from both the left and the right with sterile political debate and demagoguery.

On the plus side, the Olympics are coming to Rio this year. The games will be a success at least for television. Brazilians will have pride hosting. Rio will look marvelous and telegenic. Massive repression in the slums along with cooptation will suffice for temporary security and the problems of the violence from  favela based drug gangs and criminals. Solutions for Rio’s inadequate infrastructure (i.e. garbage in the bay, sewerage, etc.) will continue to be postponed. Eduardo Paes, – Rio’s mayor – will take credit for the success, even if it is pyrrhic. He will use this to launch an unsuccessful bid for the presidency in 2018.

After the Olympics, the legacy will be more debt for Brazil and increased inequality and social discrimination especially around Olympic sites. But this is nothing new in Brazil.

Brazil’s current mosquito crisis (resulting in dengue, zika and birth defects) is already a crisis but will be addressed. Paradoxically, major public health issues have brought out the best in Brazil’s creative problem solving. Witness how Brazil dealt with Aids and somehow the country will channel Osvaldo Cruz, Carlos Chagas and Vital Brasil (all well known contributors to public health) to at least make it past the Olympics. Hopefully, the current anti-corruption atmosphere will attenuate the possibility of a new public health scandal as we have witnessed in the past, for example when Jose Serra was Health Minister.

As for corruption, the Lava-Jato investigations will continue as will others into the Brazilian tax system, the National Development Bank, the Rio San Francisco irrigation project and on and on.

It remains to be seen if entrepreneurs will benefit from reduced terms and pardons. Many people want to pardon Lula’s grey eminence, Jose Dirceu, condemned in the Mensalao scandal and then swept up again in the Lava Jato. I don’t think Dirceu will be pardoned. But politicians have been luckier than entrepreneurs in penalty reduction.

It is basic for the Brazilian economy that, for any possible recovery through infrastructure projects, companies with the history and skill set of Odebrecht and Andrade Gutierrez be left somewhat in tact. Both companies, for example, are needed to complete the Olympic City and related infrastructure projects such as the subway and road access system. Leniency of some sort seems to be in the national interest in spite of the demands and need to punish corruption.

Outside of the Olympics, Brazil’s health, educational and physical infrastructure will continue to deteriorate. This decline will exacerbate the political problems that the Workers’ Party and Lula will face in the lead up to the 2018 presidential election. Unfortunately, the social and economic pact that Lula sewed together in 2002 has proven unsustainable in the long term. Instead of creating alternatives, Dilma’s policies have narrowed Brazil’s development options.  In spite of this, the depth of the problems actually tend to favor Dilma’s survival as any substitute will have limited time and political capital to deal with the ongoing problems that Dilma and her administration have exacerbated.

Petrobras will be forced to divest resources and assets. It remains to be seen if this will take place in production, refining or distribution. For Petrobras to survive (the Brazilian government will ensure its survival in some form), this restructuring and liquidation of assets must happen.

Brazil’s Central Bank still predicts over 50 billion in FDI (Foreign Direct Investment) even as Brazil’s credit rating has been downgraded by the three major international credit rating agencies.  Brazil is back to junk ratings but this is pretty much where the country has always been as the upgrades only took place in 2008.

Some of this will encourage foreign capital to take advantage of the weak currency buying opportunities of major Brazilian companies in retail, health, education, beauty cosmetics, media and even some industrial sectors.

Arms manufacturers Taurus and Rosetti will continue to sell their handguns. And once again, more than 50,000 Brazilians will die gun-related violence this year.

Agriculture will face a difficult year because of drought and lack of credit. Industry continues to contract.  Retail and wholesale already report end of the year declines in sales.  Pessimism reigns but the beaches are packed.

Even bankers may take a hit. Nevertheless, this retrenching will strengthen survivors and new businesses and new ideas always find Brazil’s size and still 2 trillion dollar economy attractive.

This year’s elections for mayors and city councils will happen take place uneventfully and may provide some indication of trends for 2018, but essentially municipal politics depend on local personalities and do not directly reflect party preferences at the national level.

Even as fares and the cost of public services increase with the new year, street demonstrations, strikes and protests will remain routine.  However, they will not be big enough or long lasting so as to change things one way or another.

At this point, the tendency will be to batten down the hatches and go into survival mode, something that Brazilians have often been forced to do.  We will increasingly focus on futbol and hope for Dunga’s successor and the always possible ressurection of the Selecao.

Family and friends will remain important as ever and the churrascos and festas will continue with maybe a little less “fartura” (abundance). So Brazil continues to attract and repel, encourage and disappoint, and remains the figurative and mythological land of the future always postponed.

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2 comments on “Brazil: Predictions for 2016

  1. […] As long-time readers know, I do a New Year’s prediction for how Brazil will fare over the coming 12 months. As part of this, it’s only fair to go back and assess what I got right and wrong. I’m giving my 2016 predictions a gentlemanly B-. Here, for verification, is the link to those year-old predictions: https://allabroadconsulting.wordpress.com/2016/01/01/brazil-predictions-for-2016/ […]

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