My first memories of Brazil come, courtesy of Walt Disney and his animated adventures using Donal Duck and Paul Parrot. Walt, one always thinks of him as Walt, was that cross between father and grandfather you never had but always wanted. In my mind he seemed able to touch upon the character of a story, an ideal, or a land. Well, since that time I have always wanted to go to Bahia but never got around to it. The Girl from Ipanema, Rio, all those lovely sights, quiet nights and quiet stars, quiet chords on my guitar. Romance, thy name is Brazil. Until lately.
Back in 2008 I started paying more attention to Brazil. After all, the Japanese had been opening factories and buying raw materials for a few years. Lula had been elected and was the promise of a new phase in Brazilian politics. The landless revolts were still stirring as the poor and their battling redevelopment and new construction. Crime was still high in the streets but the police were making headway. And the Chinese had come to town to trade and invest. The offshore oil boom was hitting its stride and both the World Cup and The Olympics promised to give the country the economic boost and most wanted prestige. True, there were a few squabbles but nothing Brazil, as a family, couldn’t handle. Investment looked good though mostly limited to the EFT markets. One could find a few direct plays with the select ADR stocks but other wise, one played on the periphery of the markets.
But no good deed ever goes unpunished and Brazil was no different. What had been trumpeted as the world’s fifth largest economy, Germany being firmly in fourth place, was starting to show cracks in the structure. Lula didn’t have quite the golden touch he needed. True, he was a man of the people until it became necessary to shed some of that affectation. He did deliver on social welfare programs, buying off the poor, as it were. He had flirted with defaulting on some of Brazil’s loans from foreign investors but was persuaded otherwise. And he did pour money into the country’s infrastructure, putting thousands to work. The increase in exports, particularly to China helped to keep the country’s economy growing. But inflation was always a threat. And eventually Brazil went from a debtor nation to a creditor nation. Unfortunately his foreign policy decisions did not endear him to much of the economically developed world. But the real problems he left for his successor were the continuing scandals of political corruption. Local politics was left unreformed and allowed to operate as fiefdoms of warlords. Local violence in politics remained business as usual. Inflation still stalked Brazil as its interest rates have remained the highest in the developed world.
Rousseff is another man or woman of the people. Like Lula de Silva, her background is marxist politics. She ran her campaign on continuing Lula programs and was forced into a run off election she barely won. Like all close elections, charges of vote rigging surfaced. But that is not unexpected in a very corrupt political machines. Many of her new plans were very controversial and pushed through. Not all went smoothly. She was re-elected by a bare margin of votes and her popularity has declined. Under her administration the gross government debt to GDP rose to 63.4%, the highest since 2006.
This is what happened in a few bullet points:
- The fiscal picture has deteriorated very sharply since 2011 at both the flow (fiscal deficit) and stock (gross public debt) levels. The primary and overall nominal fiscal surpluses at year-end 2014 were at levels last seen in the late 1990s.
- The steady decline of the public sector savings rate is leading to a wider current account deficit despite weaker growth and low investment. In fact, the twin fiscal and current account deficits are now tracking at a combined, very troublesome 10.9% of GDP, the worst picture in 15 years (since August 1999).Repairing the severely unbalanced macro picture would require a deep, structural and permanent fiscal and quasi-fiscal adjustment and a significantly weaker BRL.
- The new economic team faces, among other things, the very significant challenge of repairing the severely deteriorated fiscal picture.
- The steady erosion of the fiscal stance pushed net and gross public debt up. Furthermore, fiscal and quasi-fiscal activism undermined the effectiveness of monetary policy, contributed to keep inflation very high and drove the current account deficit to a very high level despite weak growth.
And the key numbers:
- The Consolidated Public Sector (CPS) posted a significantly worse-than-expected R$12.9bn primary deficit in December, driven by local governments and state-owned enterprises. The Central Government posted a R$755mn surplus but the States and Municipalities recorded a very large R$11.3bn deficit and the state-owned companies an also large R$2.3bn deficit.
- Overall, the primary balance of the CPS worsened to a 0.63% of GDP deficit in 2014 from a 1.9% of GDP surplus in 2012 and 2.4% of GDP surplus in 2012.
- The overall fiscal deficit (primary surplus minus interest payments) deteriorated further: to a very high 6.7% of GDP given the large 6.1% of GDP net interest bill. This is the largest overall fiscal deficit since August 1999.
- Net public debt worsened to 36.7% of GDP in 2014, up from 33.6% in 2013. Gross general government debt rose to a high 63.4% of GDP in December, up from 56.7% of GDP in 2013.
The Petrobras corruption scandal doesn’t bring her down, there are more numerous local corruption scandals waiting int the wings. The economic downturn for Brazil has been caused by the reduction of raw material exports to China and Japan. The go-go years have gotten up and gone and won’t come back for quite a few years. Meanwhile the current accounts problems with other countries has turned ugly with no beauty cream in sight. The other ugly sister on the horizon is world finance, better know as unrestrained debt. Becoming a creditor nation has its hazards since defaults in other countries make it difficult to control and recoup such funds. This, even the World Cup winner, Germany, is finding true. The inflation continues because the government must give away welfare to the populace or face revolt. This is the socialist dilemma, you can buy the loyalty of the people only as long as you have funds you can collect or borrow from the wealthy. When those funds are gone, so is your power base. I doubt the Summer Olympics will be held in Brazil in 2016.
If the Petrobras affair doesn’t bring Rousseff down, her decisions will. You have to be an exceptional politician to survive the kind of huge economic downturn that Brazil finds itself in. Rousseff is no such exceptional politician. And of course most ‘leaders’ are not (that makes the few exceptional). That in turn means we will see increasing numbers of leadership changes as economies go downhill. Argentina went through 5 presidents in less than 3.5 years at the beginning of the century. Don’t be surprised if Brazil goes down that path too. And many other countries.