BRAZIL-"Details, details!"

“Don’t confuse me with facts, just do it!”

There seems to be a bit of a problem with the announced credit expansion plan recently presented by the administration after meeting with the “Congress” of Economic Advisors (a.k.a. Conselhão or Big Council in English). 

The public banks charged with disbursing the loans that, according to the administration, will get the economy moving again don’t have the necessary lending capacity under the current rules and regulations of the Central Bank (and the Basel Accord).

I suspect the administration will consider this to be a “mere detail”.

In 2007 the public banks (i.e. Banco do Brasil, BNDES, and Caixa Economica) accounted for 34% of banking sector loan disbursements. By 2015, this share had grown to 56%. 

The banks are close to or at their prudent lending limits.

It might have helped if one of the 92 members of the “Congress” of Economic Advisors had suggested that prior to issuing any statement the government look at the financial statements of the institutions charged with carrying out the loan program.

The Brazilian Titanic remains at anchor and continues to take on water. It’s not gonna be easy to resume the course to Paradise!

BRAZIL-Food for thought and analysis

A useful glance backward

Those in Brazil long enough will remember Lula’s rise from labor leader to politician.

He once declared that the Congress was composed of at least 300 picaretas (a slang term used to describe what we can call “kleptocrats”). He also announced that he was opposed to “everything out there” and swore to bring it all down.

He remained true to both statements. The PT compromised the kleptocrats in the Congress with the mensalão vote-buying scandal and later with the virtual destruction of Petrobrás.

It’s a maxim of systems lore that “the system always kicks back”. 

The economy and political structure of any country is a huge complex system with numerous interdependent variables. When the mensalãothreatened the workings of one important sub-system (i.e. the legislature) the system recognized a threat to itself and kicked back with an investigation by another sub-system (i.e. the judiciary). The threat migrated to yet another sub-system (i.e. Petrobrás) and endangered the system further by incapacitating a national icon.

The “kickback” was the Lava-Jato investigation that has uncovered and sanctioned numerous additional threats to system survival.

The reason the system “kicked back” is that it was workingas designed by the 1988 Constitution and reinforced by the Real Plan and sought to preserve itself.

When the PT assumed the Executive Office, Lula set about following through on his stated objectives and beliefs. An objective look backward over the past 14 years reveals a repeated and systematic assault on the system.

The 28 January edition of the publication Relatório Reservado informed that the alleged “rifts” between Lula and Dilma were an elaborate pre-designed plan to carry out the disintegration of the system. 

The article is based on an interview with an individual “inside” the plan. The evidence for the existence of a pre-designed plan is circumstantial but the incidents over the past 14 years certainly lend plausibility to the allegation. 

I have argued often in this blog that the administration often engaged in a game that I have called being “competently incompetent” – i.e. committing policy errors on purpose and alleging subsequently that it was “poorly informed”, “betrayed” by unscrupulous cads, etc. etc.

Whether this is a correct assessment or not remains to be known. However, the history at least points in that direction.

If the assessment is correct, we are in for three more years of continued and worsening problems.

Hedge the enterprise and see to its survival!

BRAZIL-More news from the front

Some snippets FYI

The following are some items that have popped up in the press or in interviews with specialists and pundits:

• Urban violence: The thin veneer of civilized behavior that was generally a characteristic of Brazil has been ruptured by an increasing rate of urban crime and violent muggings. Of course, this is not new. It’s been occurring for the past few years. However it shows signs of increasing and this should be a cause for concern. Personal security should become a matter of corporate concern and require specific training for employees.
• The PMDB emerges from the political closet: Vice President Michel Temer has been traveling throughout Brazil in support of his campaign for re-election to the post of president of the PMDB. He stated recently that pressure for Dilma’s impeachment has abated and that the PMDB should begin to think about assuming command of the economy when her term ends in 2018. Many analysts agree that impeachment pressures have indeed been reduced. Fewer, however, seem enthusiastic about the idea of a PMDB presidency. What it does mean is that the “traditional kleptocrats” will have won the war, less through actual combat than by the attrition of the “neos”. It also means that following 2018 (assuming we are still here), there will still be a period of “ethics” cleansing before Brazil can significantly reduce the practice of confiscating the country’s economic rents by those in power.
• Zika virus: Brazil is approaching epidemic levels with this mosquito-borne malady. It is not unique to Brazil but local sanitary conditions and the dismal public services at the municipal level create numerous breeding opportunities. This could affect the inflow of tourists for the 2016 olympics. (The rapid spread of the virus was headline news in today’s NY Times)
• A major environmental issue: The city of Mariana in Minas Gerais was the scene of one of Brazil’s worst environment disaster as a retaining pool of toxic waste material burst releasing a wave of toxic mud estimated at 15 meters high. The entire city was devastated. The mud continued to flow to a local river and to the sea where it has moved northward to the environmentally protected areas in the State of Espirito Santos. The mud has yet to be removed and is still wet. One unaddressed issue is what will air quality be like when the mud dries and becomes airborne dust. No one yet has come out with analyses of how toxic the dust might be and what respiratory maladies could ensue.
• Inflation continues to rise and consumption continues to fall: Supermarket sales discounted for inflation and seasonal fluctuations declined in 2015 by 1.9%. Inflation in January of this year was 1.14% - well above expectations – and a harbinger of increasing pressure in 2016. Moreover, unemployment continues to rise, especially in the automotive sector where sales in January were 40% lower than the same month last year.

Analysis:

I recently observed in my regular report on Brazil that 2015 will wind up being a “middling year” – worse than 2014 but not nearly as bad as 2016! The combined effects of the fiscal imbalance, the ineffectiveness of the policies directed against it, and the plethora of smaller problems that result from the crisis at the state and municipal levels have led to a disintegration of the economy at all levels and in a wide array of areas and sectors.

Everything from public safety and law enforcement to the provision of public health services, sanitation, education, etc. have been compromised at state and local levels.

When I first came to Brazil in 1965, delays in the payment of public sector wages were common. Companies that rendered services or sold product to the public sector faced constant payment delays as well. We are now back to that kind of environment. And there is little hope in the market that the measures recently announced to restore growth and employment will serve to alleviate the disintegration of the economy.

Survival of the enterprise is the battle cry of Brazil’s private sector.

BRAZIL-"That dog can't hunt"

Much ado about nothing

The title of this post is the expression that US rural Southeners use to describe something that won't work. A political advisor might say "It won't fly". An advertising executive might say that "If you run it up the flagpole, no one will salute it." I think any of those expressions will apply to this particular post.

Dilma Rousseff held the 2nd meeting of her 92-member “Congress” of Economic Advisors (the Portuguese word is “conselho” – i.e. council – but a 92-member “council” seems to be a bit too large for its name!)

From the meeting (the photo of which looked more like a meeting of a Congressional committee) emerged the much awaited “fiscal adjustment” program purportedly designed to get the economy moving again and on a path to sustainable growth and development.

The meeting was followed by Dilma’s “heartfelt” request for the return of one of the worst, inequitable taxes ever devised – the infamous tax on financial transactions; the CPMF. She almost sorrowfully observed that it is the “only” solution to the current crisis. (Now if that tax is the onlysolution to Brazil’s fiscal dilemma, Brazil is, indeed, in very serious trouble!)

The measures that emerged from the “meeting”/seminar was the unsurprising array of demand-side measures of low-cost (and somehow unsubsidized) loans from government-owned banks.

As former Minister and economist Delfim Netto observed, the loans might allow borrowers to substitute higher cost loans for cheaper ones without purchasing so much as a single “widget” in the economy. That would not do much to stimulate output.

The program also throws a bone to exporters in the form of pre-embarkation financing. With the devaluation of the Real helping manufactured exports, this added benefit to reduce costs to exporters could prove useful. (You might want to review your transfer pricing policies with regard to outsourced purchases from local subsidiaries.)

Most analysts have come out with rather negative evaluations of the “program” emphasizing the weakness of trying to convince firms and consumers to increase their existing debt levels against an uncertain economic outlook.

In summary, at first glance, the program looks about as exciting as cold oatmeal. I will follow up with more detail (if the above is not sufficient to illustrate the apparent mediocrity of the proposed “program”)

BRAZIL-Waiting for Godot. Will he show up?

The search for a prefix

The suffix “-cracy” derives from the Greek “Kratos” translated as “power”. Brazil appears to be a country in search of a prefix to attach to “-cracy” in order to define itself.

The prefix most bandied about is “demo” that yields “democracy”. However, an historical analysis of Brazil suggests that there is hardly a national consensus as to what constitutes “democracy”. With 35 political parties, it is naïve to suggest that there are 35 different definitions of “democracy” based on ideology. I will have to come back to this after looking at other prefixes.

The current form of political organization in Brazil is defined by the prefix “auto-“. There is little doubt that Dilma Rousseff is the sole source of power in Brazil. Not even her own party subscribes to many of her policy initiatives. I do not base this assertion on my own views. Today’s press (and much of the press from the past) reported numerous times that Dilma is in charge. She doesn’t always get what she wants, but she never ceases to pursue it. And she is known for not heeding counsel.

Another prefix to “-cracy” is “merito-“. Meritocracy is not widely practiced in Brazil but there is a significant contingent of those who support it to at least make some political noise.

By a large margin, the most widely applicable prefix in Brazil is “klepto-“. Kleptocracy is ubiquitous, as the Lava-Jato investigations have shown. Brazil is now into the 22^ndphase of the Lava-Jato cases and just today some 23 new search and seizure mandates were issued. It is not unreasonable to assert that corruption is endemic in Brazil. Brazil fell 7 rungs on the Transparency International’s “Perception of Corruption” ladder. It is now in 76^th place with a “grade” of 38. This puts the country in rather poor company. 

However, it is important to observe that for the first time in Brazil’s 515-year history, those who have traditionally enjoyed impunity – i.e. members of the “elite” – are now being tried and sentenced to prison for corrupt and illegal practices.

This takes me back to the opening paragraph of this post. The seed of institutional “democracy” has been planted with the Lava-Jato investigation. The only reason I can discern for why democracy has not grown and blossomed in Brazil is that those in charge are still fighting over the booty of kleptocracy. 

Dilma Rousseff is obsessively concerned with the risk of impeachment and the opposition obsessively seeks to eliminate the PT.  No one is really paying attention right now to the “demo-“ prefix. However, with elections scheduled this year for over 5,000 municipalities, one can expect that the “demo-” will gradually become more influential and eventually affect national politics.

You cannot expect this process to be either smooth or fast. What you can expect is that the economic recovery will be faster than the change in the political culture. The latter requires the emergence of new leadership accompanied by the continuation of the efforts to discover and sanction corruption. This requires that local communities mobilize and exercise their constitutional rights. That’s a steep learning curve to be negotiated and it will have to be accompanied by some serious structural reforms that will also take a lot of time to be implemented.

Essentially, this means that “doing business in Brazil” will change markedly, especially for the foreign investor. Market volatility will increase. New markets will surface as new consumers enter the economy. You might have to downsize in some markets and re-size in others. You will most certainly need to review your financial controls and have an iron-clad compliance program.

Some signs of improvement are ephemeral. For example, the foreign trade account has improved dramatically. However, this is caused by two negative trends: the first is a deep recession that has curtailed imports, and discouraged travel abroad. The second is the devaluation of the Real that has made manufactured exports more competitive albeit with no change in productivity in the manufacturing sector nor the investment rate. Those are simply market demand phenomena that have very little effect on the structure of production and distribution n Brazil.

So you should be prepared for a long and not necessarily smooth transition in Brazil once the War of the Kleptocrats is brought to an end. 

BRAZIL-Like a freshly slaughtered pig...

...the wurst is yet to come

I was going to write a post today on the dismal situation of Brazil’s national debt, which rose sharply in 2015 to R$2.79 trillion. Moreover, the composition of the debt changed markedly with a greater-than-anticipated increase in SELIC-based issues thus making the debt more interest rate sensitive. (Other government issues are based on the Price Index or the discount at the spot sales price.)

However, I preferred to wait until the administration announces its “fiscal adjustment” program this week. I can then put the debt in perspective and analyze it and the program in context.

It is sufficient for the time being to show the numbers in the first paragraph, above for you to understand the vulnerabilities associated with the increase in the debt level and the increased sensitivity of the debt to increases in the interest rate.

The program to be announced will indicate the likely policy path of the administration for at least a couple of quarters and within which we can anticipate the effects on the debt level.

BRAZIL-A big announcement is planned

An embattled and embittered population awaits with bated breath

The administration has announced that this week (Thursday or Friday) it will announce the fiscal adjustment program to be enacted this year. Presumably it will include the financial transactions tax (CPMF) to raise revenues. This tax is the single most unfair, inequitable tax I have ever come across. It is double taxation at each level of incidence because it is applied over sales and other taxes already paid (i.e. ad valorem), it is regressive because it falls most heavily on the poor, and it is totally unavoidable. It has a huge multiplier effect since it is applied at every transaction beginning with the purchase of raw materials, through the sale of intermediates, wholesale to distributors, distributor sales to vendors, and against final consumption. In short, it's an economic monstrosity.

Pundits and analysts also suggest that the administration will seek to spend its way out of recession and do so in areas that provide a very low "social rate of return" (e.g. low-cost, subsidized housing and income maintenance programs for the poorest in the economy). While such programs are laudible in their intent, they do little to improve the efficiency of the economy. You can only run them if you have a sizeable surplus to invest for future productivity and consumption gains. Even education and health programs have a relatively long timeline to maturity.

It does little good at this point to ask how Brazil got where it is. That's simply debating sunk costs. The question now is how to get out of the place where Brazil finds itself. Brazil got off to an inauspicious start in Davos. Let's see what this week brings!

BRAZIL-The president was "dumbfounded"

Traditional “conspirators” return

On 12 April, 2014 I posted a tongue-in-cheek list of “conspirators” whose actions, according to Brazilians in power, combined to hold Brazil back from realizing its “manifest destiny” as a world power. The number of page views for that post were an all-time record for this blog.

Recently, 4 of the international “conspirators” have resurfaced to once again challenge Brazil’s “forward progress” toward its goal.

They are:

• The Economist magazine that once again featured Brazil on its cover with the headline: Brazil’s Fall;
• The World Economic Forum that just the other day suggested that Brazil might be a little less protectionist;
• The credit rating agencies all three of which reduced Brazil’s paper from investment grade to junk status;
• The IMF, that dealt Brazil the unkindest cut of all with the recent forecast of 2016 GDP growth of -3.5%.

Dilma Rousseff stated publicly that she was “dumbfounded” (estarrecidain Portuguese) at the IMF’s “temerity” and “negativity”. 

A glance backward in time shows that Dilma has confessed being “dumbfounded” often. The first time was in February, 2012 at the occurrence of a military police strike in Bahia. 

It was not until 2014 that Dilma was again “dumbfounded” in May of that year with regard to the salaries that clubs paid their football players. 

The next “dumbfounding” moment was in September when she learned that Paulo Roberto Costa, a director at Petrobrás was involved in the financial scandal that continues under investigation. 

And that was quickly followed by another such moment in October with regard to the use of plea-bargains by the Federal Police.

Apparently there were no “dumbfounding” moments in 2015 (at least for Dilma, but I confess that Ihad a few!) Now the IMF has caused yet another with its dismal forecast of Brazil’s 2016 rate of GDP growth.

A while ago I also made reference to two “targets” of the administration that would have to be dealt with in 2016. One was the Central Bank that was giving off signs of becoming somewhat more resolute in dealing with inflation. 

Central Bank President, Alexandre Tombini proved less resistant than I thought he might be. In the recent decision to hold the base interest rate (SELIC) at 14.25% while the market expected at least a 0.25 percentage point increase Tombini easily folded, also blaming the IMF’s forecast for the decision.

The other nemesis to be targeted this year is the Judiciary – most specifically the Lava-Jato investigation. Now that the investigation is drawing closer to politicians, differences are being temporarily “patched up” in order to protect the common interests of potential additional suspects and/or defendants in the Lava-Jato investigation. 

The temporary “alliances” or “truces” are designed to keep the Federal Police and the Public Prosecutor at bay and that is to the interest of both sides in the War of the Kleptocrats.

However, the Feds and the Public Prosecutor’s office are certain to prove less “flexible” than Alexandre Tombini. They certainly do not appear to be “dumbfounded” or intimidated.

In any case, 2016 is off to an “interesting” start. Things will heat up in February when everybody is back at their desks.

Meanwhile bad news continues to be announced. Inflation is reaching new heights and unemployment likewise. It could be a tough year.

BRAZIL-Some news

A most unusual day

Yesterday was a most unusual day for news.

• First, Lula humbly announced on national TV that he is “the most honest person in Brazil”. That served to clear up any doubts among many Brazilians

• Second, in spite of market expectations (and my forecast) the Central Bank announced that the 14.25% base interest rate (SELIC) would remain unchanged. Market expectations were initially for a 0.5 percentage point increase and later reduced to 0.25 percentage points on the heels of a public statement by Central Bank President, Alexandre Tombinni. Virtually everyoneexpressed surprise with the announcement that the rate would not be changed. Many analysts consider it a harbinger of rising inflation going forward.

• Finally, Vice President Michel Temer met with President Dilma Rousseff ostensibly to mend the fences that have estranged them in recent weeks. The first meeting (a private one with Dilma) lasted 15 minutes and this was followed by the inclusion of Jacques Wagner, Palace Chief of Staff and Ricardo Berzoini, Government Secretary for 1 hour. Reports described the meetings as “formal”. Analysts suggest that neither Dilma nor Temer left the meetings trusting each other any more than when the meetings began.

It was reported that Temer told Dilma that she should “listen more and talk less”. I once got the same wise advice from my Irish-descendant grandfather!

Perhaps Temer would  have left a meeting with Lula – Brazil’s most honest man – somewhat more comfortable than he left the meeting with Dilma.

That’s life, I guess!

BRAZIL-Central Bank autonomy vs independence

There is a difference!

A reader sent me an article regarding Central Bank independence vs. Central Bank autonomy (see my post of 20 January). In summary, there is an operational difference and I should have gone beyond the simple dictionary definition of the terms. I am grateful to the reader for his contribution. 

Among other differences, an autonomousCentral Bank is free to use the mechanisms at its disposal to control inflation – one of its principal functions – in accordance with the government’s policy objectives. 

An independent Central Bank can actually set its own monetary policy objectives and its own inflation targets.

In yesterday’s announcement of the decision of the Monetary Policy Committee to keep the Selic rate of 14.25%, it appears that the third characteristic cited in the referenced blog post on the 20th – i.e. obedient – is what prevailed anyway.

The article did clear up my confusion as to the difference between the two terms in the context of central banking but created some additional confusion as to what are the policy objectives of the administration!

Can’t win ‘em all, I guess!

BRAZIL-The three characteristics of the Central Bank

Autonomous, independent, and obedient

The press informed today that following a private audience with Dilma Rousseff, Alexandre Tombini, President of Brazil’s Central Bank reduced market expectations for a 0.5 percentage point increase in the base interest rate (SELIC), to be announced today. The market now expects the increase to be 0.25 percentage points to 14.5%.

Tombini was quoted that the recent reduction of the IMF forecast for Brazil’s 2016 GDP growth to -3.5% (see yesterday’s post) was instrumental in considering a reduction of the increase.

It’s not exactly clear to me how the IMF forecast affects the Monetary Policy Committee’s decision, but if Tombini says it does, then I guess it does!

(And just for the record, to attribute to John Maynard Keynes the policy-thinking of the current Brazilian administration is just this side of economic heresy!)

Maybe it doesn’t matter very much if the rate increases at all! Dilma Rousseff, who drives economic policy has said that she is not convinced of the efficacy of monetary policy to contain inflation. She might just be correct when federal deficits outrun attempts to rein in inflation. The deficits caused by spending in excess of revenues have to be “monetized” and that means increasing liquidity. If that liquidity is not absorbed, inflation rises to devalue the currency in circulation. 

At the very least, it will be interesting to see if Nelson Barbosa makes any reference to Brazil’s monetary policy in his address to the World Economic Forum on Friday.

At this moment, the only way I see inflation declining in 2016 is if the economy slips into depression with massive unemployment and private consumption and investment in the cellar.

Watch this closely.  

BRAZIL-The "de-construction" of the economy?"

The numbers make it look that way

During the 2014 presidential campaign the PT employed the term “de-construction” with reference to its approach to opposition candidates. The term refers to a form of “character assassination” common to bare knuckles political combat. It was used principally to undermine the campaign of Marina Silva who moved up on the PSB ticket when presidential candidate Eduardo Campos died in an airplane crash. While Silva’s chances of winning were relatively slim, the PT feared that she would draw votes away from Dilma Rousseff precisely in the region where the PT had its principal electoral base.

It’s no secret that I consider the Real Plan as one of the most significant policy successes in Brazil’s long history. By bringing inflation to developed country levels, it ended almost 500 years of chronic inflation. It created, for the first time in Brazil’s history, the basis for sustainable economic development and growth when 40 million Class D consumers moved up a notch to Class C and were touted in the media as a “new middle class”. I’ve written about this phenomenon in this blog ad nausea but there is little doubt about the plan’s impact.

Recent income distribution data show that at the end of 2014, the Class C income group was 54% of the population. In 2015 this group lost 4 percentage points and fell to 50%. That this represented a falling back is witnessed by the change in the share of the population in the two lowest rungs on the income ladder: Classes D & E that were 16% of the population in 2014 and rose to 27% in 2015.

This totally runs counter to the administration’s claims that it had logged major gains in reducing the level of poverty in Brazil through its “social programs”.

Together with the other numbers that have frequently been discussed herein, e.g. inflation, declines in GDP, unemployment, etc. it should come as no surprise that Brazilians are more pessimistic about 2016 than many others in the global economy.

In my post, “A blast from the past” (10 Jan) I referred to a concept raised during the years of oil price hikes and known as the “misery index”, i.e. the sum of the rate of inflation and the rate of unemployment. When this index is combined with the loss of economic status, one can readily conclude that Brazil is being “de-constructed” piece-by-piece.

Whether this is by accident, design, or simple stupidity is not known, but it is not reasonable to conclude that those in charge of the economy and policy-making are not at least aware of the situation. Various government agencies report the same statistics (e.g. PNAD) that presumably are analyzed by those running the show.

The one thing that is painfully clear is that Brazil is coming apart!

But, as I observed in a previous blog post when I quoted US Economist Herb Stein,  “Things that can’t go on forever, don’t”.

BRAZIL-Adjustments start early this year

Here we go again!

You might remember that close to the end of 2015, analysts and pundits were forecasting Brazil’s GDP growth for 2016 on the order of -1.5%. By the time the federal budget was put together, the forecast number had changed to -2.8% (where it currently stands).

Throughout 2015 the growth rate for the year was adjusted downward on several occasions and so far resides at -3.8% (likely to change once December figures have been released).

This year, the forecast revisions are earlier. We are not even 3 full weeks into 2016 and the IMF changed its growth forecast for Brazil in 2016 to -3.5%.

If this year is anything like last (and I suspect it will be) we can expect various revisions throughout the year as the expected bad news pours in.

To save yourself some anguish and constant revision of your own forecasts, you might want to consider -4.2% to -4.5% for growth in 2016.  If it turns out to be better, you won’t be disappointed.

Dilma Rousseff has announced some expenditure cuts that I expect will be revised as unemployment continues to rise and is accompanied by rising inflation at least for the first half of the year.

The basis for my forecast is that mid-term elections will be held in October and until then, Dilma has to show some progress toward a primary surplus. While it is expected that the PT will "take a bath" in the elections, Dilma will have to salvage whatever she can. However, she will also be beset by requests for patronage leading up to elections.

If exceptions become necessary to ensure votes in some municipalities, she is likely to provide “regional” spending increases. After all, it’s the squeaky wheel that gets the grease. You can expect to hear some mayors of allied parties to squeak loudly.

I simply do not expect to see an austerity budget implemented in 2016.

BRAZIL-Errata

Oops

In yesterday’s blog post I wrote that the base interest rate (SELIC) was forecast to go to 15.25% or 15.5% in the Monetary Policy Committee meeting tomorrow. The correct numbers are 14.75% or 14.5%. My apologies. It may have been a Freudian slip or simply a typo.

BRAZIL-The need for clarity

A dictionary helps

Two institutions have been cited in the press as the targets in 2016 for the PT wrecking ball.

One is the Central Bank for its interest rate policy to contain inflation. 

The base interest rate (SELIC) is currently at 14.25% and analysts predict that on the 20^thwhen the Monetary Policy Committee (COPOM) meets the rate is forecast to be increased to 14.75% or 14.5%. 

As we have seen over the past year, the administration forced a reduction of the SELIC rate, ostensibly to increase investment and consumer demand. The policy was to no avail and eventually abandoned.

Once again, the administration under pressure from former President Lula, and in accordance with the reputed views of President Dilma Rousseff has suggested that the SELIC rate is “too high” and inhibits economic growth. It follows that if that is the case, the rate should be reduced.

In a recent television interview, Dilma informed that the Central Bank is notindependent in her government. She said it was “simply autonomous”.

That statement sent me running to my dictionary to make sure I understood the difference.

I consulted both Portuguese and English language dictionaries. 

I first looked up “independent” in both languages. The results are as follows:

• English: “independent” was defined in the Oxford dictionary as 1. “not subject to  authority or control” and 2. “self-governing”
• Portuguese: “independente” was defined as 1. “not dependent on or subject to control” and 2. “self-sufficient

Then I looked up "autonomous"

• English: “autonomous” was defined as 1. “having self-government” and 2. “acting independently or having the freedom to do so”;
• Portuguese: “autônomo” was defined as 1. “that which has ‘autonomy’ (defined as the ability to govern oneself ) and 2. “that which does not depend on any other”;

I finished my short bit of research somewhat confused. Since both words relied on each other to define them, it seemed to me that they were similar and interchangeable.

If the Central Bank is “autonomous” it is “independent” in both languages. Maybe the distinction will become clear as the administration devises its policies. I guess until then I shall remain ignorant!

The other target is the Lava-Jato investigation. 

A group of defense attorneys recently published a manifesto accusing the Public Prosecutor and the Federal Police of violating the rights of suspects in the Lava-Jato investigation in order to “force” plea bargains.

There seems to be some confusion regarding this instrument to investigate organized crime and corruption. The manifesto criticized the use of “preventive detention” to “coerce” those under investigation to cooperate with the authorities to reduce their sentences if convicted as well as seeking to imply guilt in advance of any trial or right to defense.

Preventive detention with regard to organized crime can also be considered a means of protecting the accused against reprisals or violence on the part of others who may be involved in a criminal scheme or enterprise. (Being from New Jersey, I have often heard of witnesses disappearing after being interviewed by the authorities. Having them “under wraps” can serve to protect them from harm.)

Once the person under suspicion has been indicted, preventive detention can be used to protect the rule of law, e.g. preventing the individual from fleeing prosecution while ensuring the right to a trial and self-defense.

If the individual under suspicion is indicted, tried, found guilty and sentenced, he/she has the right to offer evidence to the state regarding the involvement of others in exchange for a reduction of his/her sentence.

Alternatively, the individual might choose to be a “stand-up guy” (see a previous post on this type of person) and simply go off to the slammer to serve the sentence meted out.

The accusations in the manifesto that the authorities have encouraged falsehoods and heresay or rumor as evidence does not apply to plea bargains. Whatever a defendant says under plea bargain must be subject to proof or the plea bargain is rendered null and void.

It is also useful to remember that those who agree to a plea bargain are convicted criminals. They are definitely not outstanding examples of character and morality. They are cooperating with the authorities to “save their own skins” and reduce the amount of time they will have to be incarcerated under the law. They are definitely not the guardian angels of society and the rule of law.

They are, of course, entitled to a trial regardless of whether they choose to cooperate with the authorities.

Organized crime is a special type of crime that justifies plea bargains. A person who shoots someone in a bar fight or even in cold blood has little to offer the authorities by “copping a plea” (as they say in New Jersey). If that individual is not part of a broader, organized scheme to harm society and the rule of law, he/she will simply have to “do the time” (again as said in New Jersey).

Organized crime, whether private (e.g. the Mafia) or public (e.g. corruption of public officials) has “tentacles” and networks that subvert public order and public institutions and many of them are purposely hidden from view. Plea bargains are instrumental in discovering the hidden elements and sanctioning additional perpetrators of illegal actions. However, in democratic societies they are not coerced and there is little to indicate that those negotiated in the Lava-Jato investigation fall into that category. 

If there is sufficient evidence under law to support preventive detention in the case of a particular individual, then coercion is not an issue. If the charges that have led to the individual’s detention are false or there is a risk that the individual might (voluntarily or involuntarily) “disappear” to avoid standing trial or testifying in his/her own defense, then preventive detention might be necessary and even commendable.

Finally, it would seem rather obvious that anyone involved in a criminal organization and not yet arraigned would love to see Lava-Jato dismantled and/or discredited. That’s precisely the reason for the plea bargains in the first place!

Analysis:

It’s rather clear that the two “targets” for criticism are a source of inconvenience to the administration.

Central Bank “autonomy” or “independence” runs counter to what appear to be the administration’s plans for the economy. The issue begs to be resolved. Either the Central Bank is “autonomous” or “independent” or it is not. If neither nor both, (I’m still confused as to the difference!) then these is nothing to discuss or clarify. If the bank iseither or both, then it should be allowed to do its job, as inconvenient as that might be.

As for “abuses” attributed to Lava-Jato, there are sufficient legal options available to defendants to question the actions of the authorities. A public manifesto merely “politicizes” the issue to no purpose other than to try to tie the hands of the authorities and inhibit them from performing the tasks legitimately assigned to them.

Watch developments in both these areas over the next few months.

BRAZIL-Can Brazil survive the current administration?

A scenario to consider

I recently read an outlook report on Brazil that forecasts that Dilma Rousseff will no longer be in office by the end of 2016. Since it is practically certain that she will not resign – it’s simply not part of her DNA – the implication is that she will suffer a second attempt at impeachment and that attempt will be successful.

We need to consider some other forecast variables to evaluate the possibility that she will not be around in 2017:

•   The economy in 2016 will be worse than in 2015: Given the administration’s public announcements in the first half of this month, this is a likely scenario. Not only is the administration indicating that it will not cut expenditures, it says it plans to rely on what are likely to be “low-social-rate-of-return” projects such as the income maintenance program (Bolsa Família) and the low-cost housing program (Minha Casa – Minha Vida). Both programs rely heavily on government subsidies and contribute little, if anything, to productivity gains or improvements in economic infrastructure. Both are likely to increase rather than decrease a budget deficit. 
•  Low-interest-rate lending is unlikely to jump-start the economy: While Finance Minister Nelson Barbosa has promised that selected lending at lower-than-market interest rates will not involve subsidies, it is difficult to see how this can be accomplished. A R$10 billion was added to the budget for agriculture because there was a carry-forward of funds from the “Rural Savings Program” that were not used in 2015. This program is funded by contributions from the agricultural sector (farmers, agribusiness, and co-ops) and 74% is “earmarked” to loans to farmers. What is not loaned by the end of the fiscal year reverts to the Central Bank where it earns the base interest rate (SELIC). It would appear that a “surplus” in this account is not necessarily a “recurring” event and could change from one year to the next. Other low-interest loans are also contemplated for selected industrial activities through BNDES lending. In this case, without subsidies the BNDES has to take a “hit” to its earnings. The same applies to the Caixa Economica and Banco do Brasil. How is that expected to play out? Can they afford to take the hit?
•  The President of Brazil is never totallypowerless: Decades of having to deal with an opportunistic, kleptocratic legislature interested only in securing appointments irrespective of the qualifications of the appointees to perform the tasks required of them, led to the creation of “loopholes” or “escape valves” such as provisional measures that allow the president to legislate (albeit temporarily) and create political fait accompli that stymie the legislature if it chose to reject the measures. Those kinds of powers – i.e. the presidential power of the pen to legislate – opened the door to political blackmail and diminished the power of the legislature and the “normal” separation of powers. Consequently, if she is not impeached, Dilma can continue use any remaining presidential powers to confront the legislature and/or “buy time” in increments or to simply appoint cronies of opportunistic political parties to try to hold the PT coalition together. In short, the dysfunctional political system works to her favor.
•  A majority of the Supreme Court Justices are PT appointees: The Supreme Court has occasionally been called upon to decide matters more appropriate to the role of the legislature – e.g. the recent request for the Court to write the protocols for impeachment (which is decided by the legislature and only witnessed by the Supreme Court). The Court’s decision on the protocols essentially allows one chamber of the legislature (i.e. the Senate) to override a decision by the other (i.e. the Chamber of Deputies) that is charged with recommending impeachment.

The foregoing are simply a few of the idiosyncratic characteristics of the Brazilian political system. They allow for “government by whim” and “crossovers” between and among institutions of the “normal” boundaries of the separation of powers in an institutional democracy.  When presidential decisions are in the “right direction” they can enhance management efficiency in the system. However, when such decisions are inimical to long-term, sustainable improvement, they can seriously hamper both the political system and the economy.

Analysis:

The situation/scenario described above is not likely to inflict permanent damage on Brazil. However, the idiosyncrasies cited can create enormous uncertainty in the “system”. Government planning and decision-making become a question of “feeling” and can be totally independent of facts.

While the administration has grudgingly acknowledged that “mistakes were made” there has been no attempt to attribute the mistakes to specific “actors”. That “mistakes were made” is patently obvious by the numbers of rising inflation, rising unemployment, declining growth, all in spite of numerous policy decisions for which a clear accounting remains unaddressed. 

Moreover, the implications of that statement are that policy will not change but only that further “mistakes will not be made” – i.e. that the problem was not with the policies but rather with their execution and execution was hampered by external forces such as an on-going international financial crisis, bad weather, and other such “uncontrollable” events.

Against this kind of thinking, one can only cite an old adage: Doing what you’ve always done will get you what you always got!

Or to cite Einstein “You can’t solve a problem by resorting to the same mindset that created it!”

The greatest risk to Brazil is, therefore, simply that the worst possible outcome of the current crisis situation is that it will once again revert to the status of a country of the future – and it could be a distant future indeed!

As a wag, whose name I do not recall, once observed: “Brazil is a country with a great future behind it!”

On a more optimistic note, I cite the First Law of Economics are coined by US Economist Herb Stein: “Things that can’t go on forever, don’t.”

Recommendations:

First of all, be prepared for the possibility of violent street protests in 2016 and beyond. The PT will call on its "army" of social organizations if Dilma is impeached, and protests are likely from the rising ranks of the unemployed and declining middle class if she is not.

Your dominant strategy is to closely monitor events during the next few years while building or recommending to parent to build alternative investment strategies to avoid increasing “Brazil exposure”. Your challenge is to be able to estimate the distance to the horizon and calculate how long it could take to reach it.

In the meantime, (as I have noted in a previous post) if your global strategy requires a presence in South or Latin America, you might also closely monitor Argentina as an alternative investment site and use Brazil as an outsourced production site under a regional office in Argentina. (Redundant supply chains are a requirement in an uncertain global economy).

Brazil under three more years of Dilma’s management is likely to become what Klemans von Metternich once said in reference to Italy: “A geographic expression.”