Is cor­rup­tion destroying Brazil?

Financial Mirror (Cyprus) - - FRONT PAGE -

Brazil’s Petrobras scan­dal isn’t the sim­ple dis­grac­ing of a badly run com­pany. It’s a scan­dal that in­volves top politi­cians with dire eco­nomic ram­i­fi­ca­tions, a scan­dal about a Gov­ern­ment-backed cor­po­ra­tion which used to gen­er­ate rev­enue worth 8% of the en­tire coun­try’s gross do­mes­tic prod­uct. And it couldn’t have come at a worse time.

The oil gi­ant has been ac­cused of over­pay­ing its sup­pli­ers who then il­le­gally passed some of the profit back to com­pany ex­ec­u­tives and politi­cians. Last Wed­nes­day, in its first au­dited fi­nan­cial state­ments to be re­leased in over eight months, the grav­ity of the sit­u­a­tion be­came ap­par­ent. Petrobras re­ported a quar­terly loss of $8.8 bln and now owes a to­tal debt of $170 bln. Thou­sands of work­ers have been left un­em­ploy­ment and mul­ti­ple of its sup­pli­ers and part­ner com­pa­nies have been forced to file for bank­ruptcy.

Its bad news for the Brazil­ian econ­omy. Petrobras not only sup­plies 87% of the coun­try’s oil out­put, but also ac­counts for more than 10% of all in­vest­ment. Its stock price has lost over one third of its value in the last year, and the coun­try as a whole is now pay­ing the price for its de­pen­dency. An­a­lysts have es­ti­mated that Brazil’s gross do­mes­tic prod­uct could drop 1.5% this year as a di­rect re­sult of the scan­dal.

For Brazil, which al­ready has a gov­ern­ment deficit of around 66% of the GDP, the tim­ing am­pli­fies the prob­lem. Firstly, there’s the dollar fac­tor. Al­ready this year the US dollar has gained over 14% against the Brazil­ian real. Now, as the US Fed­eral Re­serve is ex­pected to in­crease in­ter­est rates, dollar-de­nom­i­nated debt will be even more dif­fi­cult to re­pay.

Se­condly, the abysmally low oil prices are al­ready hurt­ing the coun­try’s com­mod­ity-driven econ­omy and re­duc­ing the value of Petrobras’ out­put. To re­lieve some of its debts, the com­pany an­nounced plans to sell an es­ti­mated $13.7 bln worth of as­sets, but ob­tain­ing a de­cent price could prove tricky given the cur­rent fun­da­men­tals.

Thirdly, the news has cre­ated a wave of po­lit­i­cal un­cer­tainty. Pres­i­dent Dilma Rouss­eff nar­rowly won with just 51.6% of the vote in Oc­to­ber’s pas­sion­ately con­tested elec­tion. She promised to unify the coun­try, strengthen the econ­omy, and re­duce cor­rup­tion. Her pledges and ef­forts may now be un­der­mined. Rouss­eff her­self was chair­women of Petrobras be­tween 2003 and 2010, and although she isn’t im­pli­cated di­rectly in the cur­rent scan­dal, many Brazil­ians have taken to the streets and hold her and her gov­ern­ment re­spon­si­ble for the high level of cor­rup­tion that is threat­en­ing their so­ci­ety.

So can Brazil pull it­self back up? I wouldn’t be sur­prised if it falls into re­ces­sion later this year, but it’s worth re­mem­ber­ing that this is still the world’s sev­enth big­gest econ­omy. Even with the odds stacked against it at present, Brazil has tremen­dous long-term po­ten­tial. Rouss­eff knew that was tak­ing on a chal­lenge six months ago. Now she must prove that she can han­dle the pres­sure.

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