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.”