Brazil’s slow-motion crisis has a regional impact

While much of the world’s attention on Latin America is focused on Venezuela, there is a slow-motion political and economic crisis in a much bigger country — Brazil — that could have far greater regional consequences.

Earlier this week, Brazil’s Central Bank weekly poll of almost 100 leading economists projected that Brazil’s economy will shrink by 0.58 per cent this year, its worst economic performance in the past 25 years.

20131020andresAt the same time, growing numbers of Brazilian politicians and pundits are publicly speculating that President Dilma Rousseff could be impeached in connection with the political scandal over the Petrobras oil company’s estimated $3.8 billion kickbacks to government officials and leading industrialists. The kickbacks took place while Rousseff served in Petrobras’ board of directors between 2003 and 2010.

While an impeachment looks unlikely at the moment, it has become part of Brazil’s political conversation.

Brazil’s chief prosecutor Rodrigo Janot has asked the Supreme Court to investigate 54 people in connection with the Petrobras scandal.

Their names have not yet been released, but many are believed to include well-placed politicians of Rousseff’s ruling Workers’ Party, including former ministers and current and former state governors.

Brazilian political commentators agree that this is their country’s worst crisis in more than two decades.

“We have a combination of three crises, which is why it’s not an exaggeration to say that this is the worst crisis in a long time,” Murillo de Aragao, head of Brazil’s Arko Advice consulting firm, told me in a telephone interview. “We have a big fiscal crisis, and a big political crisis, in the midst of an economic slowdown.”

Like most political analysts, de Aragao expects the investigation into Petrobras to last well into 2016, if not longer. While he does not expect Rousseff to be impeached, which would require evidence linking her directly to the kickbacks, there is no question that the ongoing investigation will weaken her politically, he said.

 Former president Luiz Inácio Lula da Silva
Former president Luiz Inácio Lula da Silva
 President Dilma Rousseff
President Dilma Rousseff

As a result of the Petrobras scandal, Rousseff is facing a growing rebellion from her allies in Congress. That is not only turning her into a lame-duck president early in her second term, but is making it harder for her to pass much needed fiscal reforms to get the economy back on its feet.

“Looking ahead, I believe that we will make the much-needed fiscal adjustments to restore credibility, and that we will be able to start a new cycle of growth in about a year and a half,” de Aragao said. “But until then, we are going to face hard times.”

Other analysts are less optimistic of a turnaround any time soon.

Joao Augusto de Castro Neves, a Brazil analyst with the Eurasia Group consulting firm, wrote recently that the fact that the Petrobras investigation will stretch out well into 2016 “will elevate the risk of the scandal escalating and implicating members of the ruling coalition, which could potentially undermine the government’s efforts to shore up fiscal accounts and implement measures to boost economic activity.”

In addition, there is the risk of a break between Rousseff and her most important political backer, former President Luiz Inácio Lula da Silva. The formar president commands the loyalty of much of the ruling party’s political bosses. If the ongoing probe into the Petrobras scandal links Lula to the kickbacks — which took place during his term — Rousseff would be forced to take distance from him, and lose his political support, the theory goes.

My opinion: In addition to the Petrobras scandal, an increasingly independent Congress and an economic recession, Rousseff could also face a resurgence of the social protests that rocked the country last year. Recent polls show that most Brazilians believe that Rousseff knew of the Petrobras’ kickbacks during her time on the oil company’s board.

Brazil’s lingering economic slowdown and Rousseff’s political troubles are likely to affect all of Latin America.

There will be an economic impact, because Brazil is by far the region’s biggest economy and buys much of its neighbours’ exports.

And there will be a political impact, because Brazil has a commanding voice in regional affairs, such as the current crisis in Venezuela, whose beleaguered government Rousseff has strongly supported.

A politically weaker Rousseff will have to take market-friendly steps to draw more domestic and foreign investments and may be more amenable to improving relations with the United States and Europe. Whatever its outcome, Brazil’s slow-motion crisis will change the status quo in the region.

© The Miami Herald, 2015. Distributed by Tribune Marketing Agency.