Brazil: How could so much go so wrong?

By Mimi Whitefield

It would be bad enough if Brazil’s embattled president, Dilma Rousseff, just had a recession and a plummeting currency to deal with. But in a perfect storm, she also has two corruption investigations, a fractious Congress and impeachment threats on her plate.

Inflation is running at nearly 10 percent, there is a soaring budget deficit and the value of the real has fallen by 32 percent. Average wages are declining and unemployment in Brazil’s six major metropolitan regions was 7.6 percent in September after years of almost full employment. And the bad news keeps on coming: In the first nine months of this year, 657,761 jobs were lost, and 1.5 million jobs are expected to disappear from Brazil’s formal economy in 2015.

Standard & Poor’s has downgraded Brazil’s credit rating to junk status, and Fitch Ratings downgraded Brazil to BBB-, which places it at just a notch above junk. Corruption investigations into both Petrobras, the state-run oil company, and the construction industry already have damaged investor confidence. Dozens of members of Congress are under investigation and important corporate leaders have been jailed.

The swiftness of Brazil’s fall from grace has given many analysts pause.

Beginning in 2003, 40 million Brazilians moved into the middle class, although recent economic reversals have made that hard-fought status tenuous for some. During the second term of former President Luíz Inácio Lula da Silva, especially during the years 2006 to 2008, Brazil was the darling of foreign investors and some analysts were predicting that sustainable growth of 4 to 5 percent annually wasn’t inconceivable.

But the Brazilian economy is expected to shrink by 3 percent this year and by an estimated 2.1 percent in 2016, said Armando Castelar Pinheiro, an economist at the Getulio Vargas Foundation’s Brazilian Institute of the Economy in Rio de Janeiro. Brazil hasn’t had such a dramatic economic contraction since the 1930s, he said.

In October 2014, Rousseff was narrowly elected to her second term after a year of protests over everything from corruption, bus fare increases, poor public health services and education, to the high cost of preparing for the 2014 World Cup. Still, “it’s unusual to have a reelection and then so quickly be under an impeachment threat,” said Eric Farnsworth, vice president of the Council of the Americas.

The volatile political environment is not good news for an economy in need of fiscal reform, but now the question has become how to carry out needed changes while there is a persistent drumbeat for Rousseff’s impeachment as well as the distractions of the ongoing corruption probes.

Rousseff won’t be able to finish her term “in a traditional way,” said Joel Velasco, senior vice president at Albright Stonebridge Group, a Washington strategic advisory firm. “It’s become more real every day. This government has failed; its policies have failed.”

He said there are four possible scenarios:

• The 2014 election could be declared void if it is found that the Rousseff ticket used bribes to finance the campaign. This is the most unlikely scenario, Velasco said. An investigation into 2014 campaign donations is ongoing.
• Rousseff might be impeached if it is found she used accounting tricks to lessen the severity of budget deficits.
• She could quit, but Rousseff has said she has “never considered resigning.” Even respected former President Fernando Henrique Cardoso has suggested she resign or issue a frank apology for her mistakes.
• Rousseff could muddle through, presiding over a “government that is rudderless.” That’s the most likely scenario, according to Velasco. If that’s the case, Rousseff needs to build consensus and assemble a kitchen cabinet of experts regardless of political party, he said.

The most serious impeachment threat to date comes from a group of high-profile lawyers who say she manipulated budget accounts to hide the seriousness of budget deficits in 2014 and 2015, but there is a legal question whether she could be impeached over something that allegedly occurred during her previous term.

Nearly two dozen impeachment requests have been filed, but the latest is not only supported by Brazil’s largest opposition party, the Brazilian Social Democracy Party, but also was submitted by former Justice Minister Miguel Reale Jr. and respected lawyer Hélio Bicudo, one of the pioneers of Rousseff’s Workers Party. But he left the party in 2005 during Lula’s presidency and became a critic.

Impeachment is a lengthy process at a time when the Brazilian economy needs urgent attention.

It falls to the president of the lower house, Eduardo Cunha — who himself is under investigation for allegedly transferring part of a $5 million Petrobras bribe to New York, where he bought a half-million dollars of Petrobras stock and then later sold the shares for $700,000 — to decide whether to accept the request.

If the lower house decides to accept an impeachment petition, it is put to a vote. It requires a two-thirds majority to send the petition to the Senate for a trial. Rousseff supporters say she now has enough votes from her coalition to stave off impeachment.

Cunha has hinted there could be impeachment news by November. But Velasco said Cunha might not be in any hurry to push for Rousseff’s impeachment. While the impeachment threat simmers, he remains politically relevant despite his own problems. “The fox guarding the hen house doesn’t want to kill the chicken,” said Velasco.

But a recent long-distance exchange of barbs between Rousseff, whose term ends in 2018, and Cunha shows there is no love lost between the two.

When asked about Cunha’s troubles during a foreign trip, Rousseff didn’t mention him by name but responded, “I lament this is happening to a Brazilian.” In Brasilia, Cunha told reporters, “I lament that her government is the most corrupt in the history of Brazil.”

Various other corruption probes have snared politicians of all political stripes, but Rousseff has been quick to jettison the guilty and the questionable from her government.

Rousseff shot back at Cunha, “My government has zero corruption.” But pressed on the Petrobras or Lava Jato (Car Wash) scandal by a reporter, she responded, “Petrobras no, some corrupt employees and others practice corruption and are in jail.” That prompted Cunha to lob back: “I did not know that Petrobras is not part of the government.”

Paulo Sotero, director of the Brazil Institute at the Woodrow Wilson International Center, said he expects Cunha will be expelled from Congress in the next few months. The Cunha affair must be dealt with before there is any move on impeachment, said Sotero, who recently joined Castelar and Velasco on a panel on the Brazilian crisis at the University of Miami’s Center for Hemispheric Policy.

An impeachment is not without precedent in Brazil. In 1992, President Fernando Collor de Mello, who was accused of accepting bribes, resigned during an impeachment process. But his trial continued and he was banned from holding public office for eight years.

For Brazil to emerge from this era of vacas magras (skinny cows), it needs to find sources of future growth, said Castelar. “It will be very hard for Brazil to export its way out of this crisis.”

A solution to Brazil’s economic woes “needs to be found within a one- to two-year horizon,” he said. “You can’t simply wait for the 2018 elections.” The 2016 budget is under discussion now. But Castelar said, “It’s very difficult to balance a budget when you have to cut so much in expenditures.”

While the end of the commodities boom and a slowdown in China and its appetite for Brazilian raw materials have hurt, the current crisis can’t be blamed on outside forces alone. “This is a crisis of Brazil’s making and it is a crisis that Brazil will be able to solve,” said Velasco. In the meantime, he said, “It’s not going to be pretty.”

But Sotero said there’s a new generation of prosecutors, judges and law enforcement officials who see their role as being public servants, the public is backing them up, guilty parties are going to jail and Brazilian democracy isn’t in danger.

“We are going through a very, very bad period, but we’re probably going to get out of it much stronger,” he said.

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