Brazil has more to worry about than the Olympics and Zika
Brazil may be concerned about the run-up to hosting the 2016 Summer Olympics in Rio de Janeiro, but it has far more pressing issues to deal with. Last week more than a million Brazilians joined anti-government rallies across the country, challenging impeachment for embattled president Dilma Rousseff. The majority of Brazilians believe she should resign, which shouldn’t be unexpected given her popularity rating is currently at a horrendous 7.7 percent. In fact things have gotten so bad in Brazil that one anonymous artist actually blindfolded hundreds of statues on the streets of Rio de Janeiro because he wanted to protect ‘national figures’ from Brazil’s history from seeing the shameful state of the country.
At the forefront of Brazil’s current woes is the investigation of business executives and government officials in the scandal of the massive oil firm Petrobras. Hundreds of executives and politicians have either been arrested or are under investigation for overcharging contracts with Petrobras and using part of the money to pay for bribes and electoral campaigns. The investigations have so far found that potentially $2 billion in bribes were paid to top government officials from Petrobras in which the officials pocketed the extra cash.
For its part, Petrobras has paid a steep price in the scandal. Since January, it was $104 billion in debt and its CEO and other top officials had resigned. The heat has also been turned up on the ruling Workers’ Party as Brazilian police raided the home of former president Luiz Inácio “Lula” da Silva just a few weeks ago. Investigators have publicly accused him of accepting bribes from Petrobras, but perhaps more importantly this shows that the Brazilian police believe nobody is above the law.
Even though in October a parliamentary commission cleared Rousseff of any involvement in fraud related to Petrobras, it doesn’t take her completely off the hook. Her opposition believes that she has failed to curb corruption in Brazil, and since several of her close aides are either in prison or under investigation, they feel she is basically guilty by association. To make matters worse, Rousseff was chairwoman of Petrobras during a number of the years when corruption allegedly took place, which coincidentally was also during the Lula presidency.
All that being said, pinning the blame entirely on the current ruling Workers’ Party would overlook the fact that Brazil has had decades worth of poor governance. Part of the problem began in the late 1990s when Petrobras became semi-privatized. This means that it is now independent and publicly traded, but the government maintains a significant share of stock, 64 percent to be exact. This was done to attract private investment, but also allow Brazil to maintain partial ownership of the company. This move did in fact lead to a massive influx of money via private investment, but unfortunately government corruption led to mismanagement of funds.
When Lula won Brazil’s presidential elections in 2002, he managed to pull millions of Brazilians into the middle class and drastically improve the economy. In fact, presently Brazil is the world’s seventh largest economy. However, what plagues Brazil is the fact that its economy is fueled largely by its own consumption, not foreign trade. Government spending hovered between 18 and 20 percent of GDP between 2000 and 2014. While that is a high number, it doesn’t necessarily pose a problem as long as the balance sheet stays out of the red. Unfortunately for Brazil, the global downturn in commodity prices particularly iron ore and agricultural products, has been painful.
When Rousseff took over the presidency in 2008, she won based on a similar platform as Lula. That is to increase public spending on social programs to bring more people in poverty up to the middle class. With public spending at 18-20 percent GDP and a decline in price with its chief commodities, these programs became untenable, but both Lula and Rousseff failed to draw them back.
With inflation at nearly 10 percent, GDP that fell 3.7 percent, and a credit rating that has fallen to junk status, Brazil’s citizens have every reason to be upset with the ruling Workers’ Party’s mismanagement of the country. In 2015, more than 1 million people had lost their jobs, and those highly touted middle class gains made earlier are now being washed away as many slide back into poverty.
Last week, Brazil unveiled new rules and legislation that would kick-start investment into its oil and gas industries. The idea behind this is to open the door to foreign companies to develop Brazil’s offshore oil deposits and bring in some much needed cash. Of course, this also sounds like a road Brazil has already travelled down doesn’t it?