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Tuesday, August 25, 2015

Gloomy Reality Dawns On Brasil



August 25, 2015 1:04 pm

Gloomy reality dawns on Brazil

Demonstrators attend a protest against Brazil's President Dilma Rousseff, part of nationwide protests calling for her impeachment, at Paulista Avenue in Sao Paulo's financial centre...Demonstrators attend a protest against Brazil's President Dilma Rousseff, part of nationwide protests calling for her impeachment, at Paulista Avenue in Sao Paulo's financial centre, Brazil, August 16, 2015 REUTERS/Paulo Whitaker TPX IMAGES OF THE DAY©Reuters
Roberto Setubal, the head of Brazil’s biggest private bank, sees a long period of gloom for Brazil’s economy as unemployment rises and Congress is roiled by corruption scandals. However, he does not believe Dilma Rousseff, the president, will be impeached.
Latin America’s biggest economy has fallen into its biggest recession since the Great Depression, hit by a triple whammy of lower commodity prices, a multibillion-dollar corruption scandal at state-controlled oil company Petrobras, and a political crisis that has made Ms Rousseff the most unpopular president in Brazilian democratic history.
“Five years ago, everyone felt that Brazil was on the brink of development,” Mr Setubal, the chief executive of Itau, said. “But happiness is the difference between expectations and reality, and expectations were too high. In a year, perhaps, expectations will be more realistic, and we will have a lot of hard work to do.”
Amid a corruption scandal that has permeated the highest levels of government and an economy forecast to shrink 2 per cent this year, Ms Rousseff’s approval ratings have fallen to 8 per cent. Hundreds of thousands of protesters have taken to the streets calling for her resignation, while investors have pushed down the real by 25 per cent, making it one of this year’s worst-performing emerging market currencies.
But rather than the economy or financial markets, the government’s most pressing issue in coming weeks will probably be the fallout of the burgeoning kickback and bribery probe at Petrobras that has already jailed dozens of senior business executives.
The probe’s focus is now shifting to Congress, probably increasing the political heat on Ms Rousseff and her fragile governing coalition. Last week, Eduardo Cunha, the head of Brazil’s lower house, became the first sitting politician to be formally charged with corruption. He quit Ms Rousseff’s coalition last month to join opposition lawmakers seeking her impeachment and has called the probe politically motivated.
Mr Cunha, who will be investigated by the Supreme Court, insists he is innocent and has said he will remain in his post. Fernando Collor, a former president impeached on corruption charges in 1992 but who has since made a comeback as a senator, was also charged.
Five years ago, everyone felt that Brazil was on the brink of development. But happiness is the difference between expectations and reality, and expectations were too high
- Roberto Setubal, chief executive of Itau
“To her credit, Dilma has kept the [corruption] investigation going. The country’s institutions are holding,” Mr Setubal said. “I do not think she will be impeached.”
Although Ms Rousseff has not being investigated, she chaired Petrobras when much of the corruption took place, and her government faces separate probes that it cooked the budget and broke campaign finance rules. Both are possible grounds for impeachment, a process that would require the support of two-thirds of Congress where many lawmakers are increasingly focused on saving their own skins than pushing through unpopular economic stabilisation measures.
Business leaders, fearful that political instability could turn a bruising recession into a more widespread economic crisis, have called on lawmakers to pull together and pass measures needed to put the economy on track and stave off of a downgrade that could see Brazil’s credit rating cut to junk status.
A mixed bag of spending cuts and tax breaks, called the Brazil Agenda and supported by Senate house leader Renan Calheiros of the centrist PMDB party, has made some progress through the legislature. But analysts said it was unlikely to be fully implemented.
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“Even with a friendly Senate and the PMDB . . . Rousseff’s fiscal agenda faces an uphill climb with Cunha presiding over the lower house,” warned Cameron Combs, an analyst at Eurasia, the risk consultancy.
Meanwhile, there are few signs the Brazilian economy has yet touched bottom. Unemployment has risen sharply to 7.5 per cent, while inflation is running at 9.6 per cent as regulated energy prices have been unfrozen and the real’s depreciation has fed through into higher domestic prices.
Analysts say those effects should pass quickly, though, thereby allowing the central bank early next year to start cutting interest rates, which have been jacked up to 14.25 per cent.
Still, while that might stabilise domestic consumption, it is unclear what might power Brazilian growth in future. For the past decade it has been helped along by high commodity prices and abundant consumer credit.
“I think the economic recovery will be slow,” Mr Setubal said. “But price distortions have been removed, and you are already starting to see a positive response on the external accounts — the current account deficit is falling and exports are rising. It is the external sector that will lead the recovery.”