BRAZIL-Things are unraveling

Harder times ahead!

The past few days have been marked by some rather important events.

First, Moody’s finally downgraded Brazil to Ba2 – two rungs below investment grade. That now makes unanimous Brazil’s “junk status” among the three principal rating agencies. All three also added that the outlook was “negative”, implying further downgrades going forward.

The administration reacted as usual, stating that Moody’s failed to give adequate weight to the improvement of the external accounts that are yielding a surplus. (Well, kinda! Exports are rising on the heels of the devaluation of the Real and imports have fallen into the cellar. There’s been no change in the structural elements of competitiveness.)

There was a brief flurry of discussion of the downgrade. The most significant datum presented was that the average time observed for a country that has been downgraded to get back to investment grade status is between 5 to 10 years. The administration talked as if it could all be taken care of by next week! (Just a minor glitch!) 

The way back for Brazil will be complicated by a still-volatile global business environment, possible interest rate increases by the FED, and a slowing of the rate of global growth.

Another item of interest occurred in the PT. 

Dilma made it known that she might not show up for the party’s 36^th birthday party. It seems there are some issues to be resolved between the administration and its party.

One, for sure, is the administration’s support for the measure to remove Petrobrás’ obligatory participation in 30% of all exploration projects in the pre-salt oil deposits. The party mucky-mucks are opposed to the measure. (They seem to be oblivious to the fact that Petrobrás is practically prostrate!) 

The PT is divided between those who want to get to Paradise on the Brazilian Titanic (i.e. using the “system”) and those who would just as soon sink the ship and rely on increasingly frustrated passengers to simply riot (i.e. take the social movements to the streets). Both sides share the same ideology. The fight is over “method”.

While the leadership of the various social movements “talk” a good revolution I have not sensed the same degree of conviction among the rank-and-file of the groups. Brazilians are not given to “collective anger”. It’s one thing to show up for a demonstration, quite another to confront the army. Bravado tends to diminish under gunfire and nightsticks. However, I suggest you not rule out confrontation in your scenarios.

Another interesting development is the recent TV campaign by the PMDB essentially extolling its ability to govern. It no longer paints itself as the ally of the PT and sounds increasingly like an opposition party.

At the birthday party, the PT is expected to announce a National Emergency Program. It’s totally unclear as to what the party has in mind given its unwillingness to impose unpopular or painful measures. More policy “froth” won’t improve the situation.

Lava-Jato continues to get closer and closer to Lula and Dilma. The campaign marketing director for both Lula and Dilma (João Santana) and his wife and business partner have been arrested. So far, they have been throwing the firm Odebrecht under the bus. This could take a while!

Analysis:

Things are gonna get worse! The fiscal accounts showed a slight upward (and positive) blip in January but no one believes the improvement represents a change in the trend. Revenues continue to decline and the administration continues to spend in spite of some half-hearted efforts to make some cuts. The split within the PT does not help matters.

You’d think that at the age of 36 and having been in the presidency for 13 of those years, the PT would have acquired some maturity and “gravitas”. Unfortunately, the party hardliners seem willing to toss the baby out with the bath water.

Lula’s only response thus far is to launch an attack on the opposition (PSDB) in a kind of “you’re in no position to point a finger at anyone” approach. That does not address the issues that concern the public-at-large that is concerned for job loss, continued rising food prices, and inept management.

My suggestion is that you simply batten down the hatches and ride out the storm. Nothing seems to be moving in the right direction except the Lava-Jato investigation.

Invoking the Arab proverb: “The dogs bark, but the caravan passes”