A GLOBAL THREAT
Fallout from a Brazilian economic implosion could send shockwaves worldwide.
“Brazil is living the last hours of Pompeii.” — Antonio Ermirio de Moraes, Brazil’s leading industrialist and philanthropist when he died in 2014.
Brazil was an investor darling among emerging economies just a few years ago. Today it is the world’s biggest economic basket case.
The wretched conditions in Brazil are a global threat.
With its GDP of $3.2 trillion (U.S.), larger than Canada’s and seventhlargest in the world, the contagion from a Brazilian economic implosion could trigger a run on emerging markets worldwide.
After all, the ruinous 1998 Asian financial crisis that wreaked havoc around the globe began with a surprise devaluation of the Thai baht.
Brazil is in economic free fall, its economy having shrunk 3.8 per cent last year. The Organization for Cooperation and Development (OECD) forecasts a further 4-percent GDP drop this year. The painful Russian recession, by contrast, has seen GDP drop by 1 per cent.
Brazil is now paying 7 per cent interest on its debt, a level not reached by a troubled Italy or Spain during the worst of the eurocrisis. Brazil is losing about 150,000 jobs a month. Inflation is running at a suffocating 11 per cent. Brazilian debt is rated junk status. And Brazilians are trying to oust President Dilma Rousseff, caught up in a corruption scandal, in a determined impeachment campaign.
The swift, downward trajectory of Brazil is a tragedy of dashed expectations.
In the booming 2000s, Brazil’s then-president Luiz Inácio Lula da Silva was able to narrow the gap between rich and poor with a bevy of government-funded social assistance programs.
So dynamic was Brazil’s economic growth that it became a “BRIC” country, the informal coalition of emerging economic superpowers, along with Russia, India and China.
But then came the plunge in the price of oil, on which Brazil is even more dependent than Canada. At about the same time, Brazil’s largest trading partner, China, began cut- ting back on its Brazilian imports of natural resources.
Finally, a probe that began two years ago into Petrobras, the country’s giant state oil monopoly, revealed that Lula and his protégé, Rousseff, along with officials of their governments, might have accepted illegal payments from Petrobras, which is controlled by Rousseff’s government.
“There was a feeling that the country was getting ahead, and then it vanished,” Arminio Fraga, a former head of Brazil’s central bank, recently told O Estado de São Paulo.
“Brazil ended up in this situation by doubling down on credit and fiscal expansion,” Fraga said. He was referring to the continued expansion of Lula’s social-justice programs under Rousseff, 68, who succeeded Lula, 70, in 2011.
“(Brazil) woke up with the nightmare of a paralyzed country. . . It is an economic tragedy.”
So parlous are conditions in Brazil that even more troubled economies, like Argentina and Venezuela, scarcely hold the attention of global investors.
What Brazil did under Lula and Rousseff was assume that the boom times of the 2000s would continue indefinitely. And so Brazil continued spending and borrowing.
In short, Brazil created an “entitlement trap.”
Lula and Rousseff’s Workers’ Party kept layering on additional social-support and corporate welfare programs, and borrowed heavily to finance them. The downside of entitlements is that once you’ve created Medicare, RSPs and the like, you can never take them away.
For Brazil, those entitlements now account for an enormous threequarters of the national budget. Those locked-in welfare expenditures and transfer payments (the latter mostly going to the Workers’ Party’s strongholds in the poor northern states) cannot even be trimmed without risking social upheaval.
And, of course, much of the 25 per cent remainder of the budget is eaten up by interest payments on Brazil’s swollen debt.
The relatively untested Rousseff was bound to “wear” an economic downturn. That’s politics as usual.
What has made Rousseff’s brand poisonous is her alleged illicit payoffs from Petrobras.
Petrobras is one of the world’s biggest state-owned oil monopolies. It wields the influence in Brazil that Canada’s Big Five banks and 20 largest industrial enterprises combined would exert in Canada.
Petrobras’s affairs are intertwined with every federal and state Brazilian government agency. And for decades, Petrobras has been widely known as a cesspool of cronyism and corruption.
That being the case, the allegations against Rousseff and her mentor, Lula, are readily believed by a great many of Brazil’s 205 million people.
Rousseff, now routinely described as the most hated person in the country, has managed to unite Brazil in a most unfortunate way.
As recently as December, Rousseff commanded 75-per-cent public approval.
Today, about 65 per cent of lowincome Brazilians dislike Rousseff. They fear she will impose austerity that will wipe out a dozen years of improved living conditions for the disadvantaged.
And about 75 per cent of Brazil’s wealthy elite regard Rousseff as unfit for office. Which makes Rousseff’s fall among the fastest and steepest in the history of the hemisphere.
Rousseff has unhelpfully claimed the impeachment campaign is an attempt at a “coup,” as if her tin ear for popular sentiment wasn’t already evident.
Lula, by contrast, remains a populist hero in the favelas of São Paulo and Rio de Janeiro, and in Brazil’s impoverished northern states. Though he too is tainted by the Petrobras scandal, Lula still enjoys the gratitude of Brazilians who have benefited from the 12 years of economic-justice programs launched by the former labour leader and continued by Rousseff, an economist.
Brazil is fortunate in having $371 billion (U.S.) in foreign reserves to cover immediate debt obligations. And most of Brazil’s debt is held internally, in contrast to a Greece largely in hock to foreign debtholders.
Still, Brazil’s least-awful way out of this mess is intervention by the dreaded International Monetary Fund (IMF). The IMF’s arrogant dictums demanding harsh austerity and wrenching free-market reforms have long made it a whipping boy for Latin American politicians.
But an IMF role seems imperative. The IMF is used to bringing order out of chaos (and taking the blame).
The grimmer alternatives include a relapse of Brazil’s 1,000-per-cent inflation of the 1970s and 1980s. Another is to let GDP keep shrinking to the point where debt restructuring is inescapable. That would mean a haircut for creditors worldwide, and a very long time before Brazil is again attractive to outside investors.
Brazil cannot adopt a curative soon enough. Already, protests throughout the country, notably between Lula supporters and middle-class activists, threaten to tear the country apart.
No question, inviting IMF intervention would be humbling. Just 18 months ago, Rousseff proclaimed: “The IMF will never again command Brazilian politics.”
It’s more certain that in a few months, Rousseff won’t command Brazil.
dolive@thestar.ca