BRAZIL-Now what? Some initial observations.

New scenarios emerge

The previous post leaves little doubt that Lula scored a victory at the Battle of Lava-Jato.

If you have ever had a tooth nerve go bad you know that gas builds up inside the tooth and causes almost unbearable pain. You have to very quickly find a dentist to drill a hole in the tooth to release the gas. The relief is immediate. You will suffer later when you have to go through a root canal procedure.

That situation is not unlike what happened today. Dilma’s inept management of the economy, the 5 million protestors on the 13^th, and the continued decline of the economy, rising inflation, companies going into Chapter 11 workouts, and increasing unemployment were not unlike that pain that precedes the root canal work. 

The simple fact that Dilma has been neutralized offered immediate relief as the talking heads of the news agencies began speculating on what policies will emerge starting ASAP.

  

But as you know, root canal work is painstaking and takes a lot more time than just releasing the gas build-up in the tooth.

I would expect Lula to take some time to “assess” the damage. Then he would address the nation with the results of his “assessment”, cluck his tongue, lament the inconvenience that he did not cause, then huddle with his economic team to mull over policies.

If you were in Brazil during the days of the Sovereign Debt Crisis you remember that Brazil discussed numerous “Memoranda of Intent” with the IMF. The memoranda continuously failed to meet expectations, were negotiated again, and again registered partial results. Eventually, they were jokingly referred to as “Memoranda of Hidden Intent”.

Under the first civilian government of José Sarney there were 5 separate economic stabilization plans imposed over a 5-year period. The currency was changed a number of times, wage and price controls imposed, wage and price controls lifted, then imposed again. Reforms were proposed, debated ad nausea in the legislature and never enacted.

You can burn up a lot of time with that approach. Lula has to apply it for 8 quarters. You know as a business executive that the adjustments required for each change can take a month or so. Then comes the assessment of the results followed by the conclusion that the plan did not work and a new one would have to be devised. At the end of the day, a full quarter or more can be used up. Lula was there as a labor leader when it all happened.

I don’t forecast that this will necessarily be the case this time around, but it is a scenario I don’t think you can afford to ignore.

Analysis:

The key to bumping problems forward with your belly is the level of control you can exercise over the legislature. Keep ‘em talkin’ is the rule.

However, when what I described above was going on, Brazil’s Judiciary Branch was nothing like it is today. There were no Petrobrás or mensalãoscandals and no business executives of Brazil’s largest companies sitting in prison.

There was no Real Plan to bring 40 million new consumers into the economy and then see them tossed back unceremoniously to their former Class D status.

There were no 5-million participant demonstrations.

Your scenario building out over the next couple of years will have to take those new conditions into account. Now that the discomfort of the tooth has been relieved with the “neutralization” of Dilma, the discomfort of the root canal work could be a major issue.

I will be following up on this over the next few days and posting my observations. In the interim, I suggest you pull together your management team and take a look back at what has been called The Lost Decade.

Good luck!