Like Its Politics, Brazil’s Economic Mess Is Far from Over

Monica de Bolle says forecasts for a rebound next year from the deepest recession in decades may be overly optimistic as the country’s political morass takes another turn for the worse.
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Unedited transcript

Pedro da Costa: I’m Pedro Da Costa this is Peterson Perspectives, I’m joined today by Monica de Bolle to speak about Brazil’s seemingly endless political mess and I have to say, the casual observer of Brazilian politics can be forgiven when you hear talk of impeachment for thinking we’re still talking about Dilma Rousseff, the recently impeached president.

But now the impeachment talk refers to the vice president who took over for her. Can you tell us a little bit about what’s been happening in the last couple of months while everybody has been focused on the United States?

Monica de Bolle: Well the mess has continued as, I think, we spoke on previous, previous occasions here. The impeachment of Rousseff was not going to make the political crisis go away and it did make it die down for a little while, but it was a very short period and now it’s back as was expected by some, not others.

And there is this impeachment talk about vice president, Temer, who has taken over and who is now the president of the country because of a few things that came out over the last few days. There’s one thing that hasn’t come out yet which is the plea bargain agreement by Odebrecht Construction Company and that was at the heart of the corruption scandal out of Petrobras. But apparently some members of his government have been cited in that -- maybe he has been cited in that, nobody quite knows.

Pedro da Costa: There have already been several ministers who have been forced to quit.

Monica de Bolle: But there have been several ministers that have been forced to resign. So he’s been in power for six months and he has now lost six ministers so this is a rate of one minister per month. The latest to go was actually his chief political articulator, his main intermediary with congress and he fell because of, basically, corrupt dealings. It has nothing to do with Petrobras, it has to do with other things that were going on but-

Pedro da Costa: Have they been able to fill these posts or are these now empty cabinets?

Monica de Bolle: Some of them have been filled; others have not. This post, in particular, is a post that’s very much within the inner circle of President Temer. So he has already said that he’s going to be taking on the role himself and he’s going to be splitting with one of his chief of staff. So another member of his inner circle until he can find somebody who is squeaky-clean and can thus fill the role, which in Brazil these days is kind of hard to find.

Pedro da Costa: So getting to what we’re all about here at the Peterson Institute, so the economic implications of this political mess. So you rightly predicted a few months back that we wouldn’t just bounce back because of the lifting of uncertainty that came from Dilma’s impeachment, which led to a steep market rally. So where do you think this leaves the economy? Can you talk about the trouble spots and the issues with the States in particular?

Monica de Bolle: Well there are many trouble spots. I mean, we had conversations here before about the situation of Brazilian states. So Brazilian States are now in a very, very difficult situation. Several states are de facto bankrupt. Brazil doesn’t really have a bankruptcy law for states, so basically what it means is that these states would need some kind of government bailout. But the government is not in a position to provide bail out at this point because the fiscal situation, there’s a fiscal crunch in the country all around; so that’s one problem.

The other problem is the sheer depth of the political crises, the corruption scandal and how that takes a toll on the economy with some months ago I had predicted, look this isn’t going to get any better and the prospect for a swift recovery that people had been envisaging say only three, four months ago, are really not sound. It’s not based on any kind of fundamental view of what’s actually going on the ground and this is what we’re seeing materialize now.

Today Brazil just released its third quarter GDP figures and actually, the recession has gained, has steepened in the third quarter. It looks deeper in the third quarter relative to the second quarter, even relative to the first quarter in 2016.

Pedro da Costa: So it’s moving in the wrong direction, basically.

Monica de Bolle: So it’s moving in the wrong direction, there are no clear signs that things are going to get any better in the fourth quarter. In fact, the indicators seem to be pointing still in the direction of, you know, a recession very much in place. That means that the scenario for growth in 2017, at least, what people have been thinking, maybe Brazil will grow one percent, one and a half percent, even two percent, which, were numbers being thrown out there by both market analysts as well as by government officials.

These things are pretty much out of the cards now, so it’s looking very much as if Brazil will likely have very little growth if any. And if that’s the case, then the whole scenario for meeting fiscal targets, even though the fiscal target for next year is a deficit and so on, these are now very much in question.

Pedro da Costa: I assume that the forward momentum that was the, I guess, the expectation of growth came from a potential momentum from reforms, right? So I assume that as the political fallout worsens that the prospect for such reforms and therefore the growth that would come from them gets depleted.

Monica de Bolle: Absolutely and they were basically two -- the government was focusing its reform effort on two fronts. So on the one hand, it was focusing on passing a spending cap, a limit on expenditures, which needs a constitutional amendment. This has already moved forward relatively well. It’s received the support from the lower house that it needed. It appears to be receiving the support from the senate that it needs. So it will probably come into place by the end of this year.

But that effort needs something which is complimentary to it, and it’s a very important reform as well, social security. And that one is highly unpopular and hasn’t yet gone through the kind of voting and procedures that have to go through, that these things have to go through in the Brazilian congress. So most likely the social security reform without which the spending cap really has no bite, will probably only come to the floor say sometime early next year, but at that point, given that the situation really isn’t improving, the economic situation.

Given that the state of subnational finances is so bad, that in certain states, public services are being halted so people are not having access to health, education, security is falling apart. In Rio, the crime rates have spiked in recent months because of this, so people are feeling that very, very much in their daily lives. This could very much spark a very, very deep backlash against any other reform effort that the government attempts to push through congress.

Pedro da Costa: So is the heavy political mood that we’re seeing in the United States and in Europe that we’re not alone up here and that it’s actually a kind of a global phenomenon.

Monica de Bolle: It is a global phenomenon and I think in Brazil is kind of a test case for everyone in a certain sense because since in Brazil a lot of these so-called populist policies were put in place over the last six years. And for a while, they actually worked but now the country is in this situation that we see, of course, compounded by corruption and all of these other things that have happened, are really telling for -- are really sort of alarm bells or at least, signals to what shouldn’t be done and what shouldn’t really be pursued.

Pedro da Costa: Monica de Bolle, thank you so much for your time.

Monica de Bolle: Thank you.