FT LatAm Venezuela Is Making Brasil Look Good

Venezuela - making Brazil look good By Samantha Pearson  June 3, 2016 In most countries a 5.4 per cent reduction in GDP would not be cause for celebration. But when Brazil’s statistics office on Wednesday revealed the depth of the economy’s contraction in the first quarter from a year earlier, optimism swept across the markets, boosting the country’s stocks and currency. Analysts had expected the economy to shrink 6 per cent year-on-year and contract 0.8 per cent from the previous quarter. In the event, it only slipped 0.3 per cent. The better-than-expected result, though, was largely due to a government spending splurge – exactly what Brazil’s interim president Michel Temer plans to rein in as he tackles the country’s dire fiscal crisis. On Thursday, his government won a key victory in Congress when the lower house approved by a large majority a bill that will ease budget constraints by reducing required spending. Mr Temer is betting that austerity measures will help pull the country out of its deepest recession on record, affording his interim government much-needed legitimacy in the process. While recent polls show as many as 70 per cent of Brazilians support the impeachment of President Dilma Rousseff, only 1 per cent would elect Mr Temer as president given the chance. However, building credibility in the midst of the country’s largest-ever corruption scandal has not been easy. On Monday Mr Temer lost his second minister to the graft investigation in two weeks. Fabiano Silveira, the anti-corruption minister no less, quit after leaked wiretaps suggested he had tried to derail the investigations.  Meanwhile, a parallel probe into corruption at the country’s tax offices is threatening to wreak even more havoc in Latin America’s biggest economy. On Tuesday, police indicted the chief executive of Bradesco, the country’s second-largest non-state bank, as part of the so-called Zelotes Operation that has already implicated steelmaker Gerdau and Joseph Safra, Brazil’s second-richest man. However, Brazil’s political and economic crises are nothing in comparison to what has been happening across its northern border in cash-strapped Venezuela. As Brazil’s economy began heading for its current recession at the end of 2014, Venezuela was already suffering a deep contraction. While the IMF expects Brazil's economy to shrink 3.5 per cent this year, Venezuela's economy is forecast to contract 8 per cent. In Brazil, double-digit inflation has caused widespread concern yet Venezuelans may soon be facing four-digit inflation. Furthermore, while Brazil’s airline industry has been hit by the country’s recession and weak currency, at least there are still flights out of the country. Over the weekend, Lufthansa halted its Venezuelan operations, cancelling the only flight between Germany and the Latin American country. Latam Airlines then followed. Before decrying their 'undemocratic' government and financial suffering, dissatisfied Brazilians might also spare a thought for their poor neighbours. Quote of the week “Given its exceptional depth, breadth, and duration, the ongoing cyclical contraction of real activity [has] acquired some of the characteristics of an economic depression” – Alberto Ramos, economist at Goldman Sachs, on Brazil Chartwatch Distribution of the Brazilian population by socioeconomic class from EM Squared. The week in review Fujimoris continue to divide Peru as Keiko closes on presidency   Daughter of jailed autocrat Alberto Fujimori is frontrunner in Sunday’s close election     Peru hits back at US hedge fund over $1.6bn claim   Gramercy files for arbitration over long-defaulted bonds     Emerging markets to slow as convergence theory takes hold   Narrowing income differentials with west reduce scope for strong growth     Brazil’s GDP reveals depths of recession   Economy shrinks 5.4% in evidence of challenge facing the new Temer government     Latam’s submerging middle classes add to political risk   Commodity rout and yawning deficits threaten millions with return to poverty     Brazil cabinet hit by new wiretap scandal   Temer moves quickly to contain fallout after losing second minister     Brazil moves to shrink the state   Temer’s interim government is trying to deflate the country’s bloated spending     In Venezuela the stage is set for a chaotic exit   The drama of Maduro’s presidency is set to end in tragedy, writes Daniel Lansberg-Rodriguez     Lufthansa grounds flights to struggling Venezuela   German airline cites economic woes and currency controls for decision to suspend service     Petrobras scandal highlights need for deep reform in Brazil   Political changes required to try remove the carrots that incentivise corruption     FT LatAm Viva features commentary by the FT's Latin America team and stories from across the FT. Forward this email to friends and colleagues, who can sign up here. Send your feedback to