WSJ, March 25, 2016 Brazil Economic Woes Deepen Amid Political Crisis Country is heading for one of its worst recessions ever, yet its political straits draw all the attention By JOHN LYONS
SÃO PAULO—Brazil’s economic crisis is as bad as its political one. Latin America’s biggest economy appears headed for one of its worst recessions ever. It stalled in 2014, shrank 3.8% last year and now faces a similar contraction this year. Unemployment rose to 9.5% on Thursday as wages fell 2.4%, both trends forecast to worsen. One in five young Brazilians is out of work, and Goldman Sachs says Brazil may be facing a depression. The deteriorating outlook forms a dire backdrop for Brazil’s political straits. President Dilma Rousseff, deeply unpopular, faces impeachment proceedings in Congress amid a widening corruption scandal surrounding the state oil company, Petróleo Brasileiro SA. That situation is consuming so much energy from policy makers and Congress that the economic downturn isn’t getting the attention it needs, observers say. “The gravity of the situation is this: We have the kind of problems where if nothing is done, things will definitely get worse,” said Marcos Lisboa, a former finance ministry official who is now president of the Insper business school in São Paulo. “Pretty soon we could be talking about the solvency of the federal government.” Brazil fended off the results of the 2008 global downturn with stimulus spending, and is trying to again inject money into the economy to spur demand. In January, the Rousseff administration unveiled some $20 billion of subsidized loans from state-owned banks such as the BNDES to boost agriculture and builders of big infrastructure projects. But this time, the country has less leeway to fund stimulus measures. Brazil’s tax take is diminishing, and the Planning Ministry said Tuesday the government needs to cut around $5.9 billion of spending to meet its budget target. On Thursday, Finance Minister Nelson Barbosa asked Congress to loosen the target to allow a bigger deficit in 2016. Some investors say stimulus policies such as cheap credits from state banks haven’t done much long-term good, because they produced big deficits and the money was often poorly invested in money-losing dams and refineries. Brazil’s stock market and currency have risen since March 17 on optimism that Ms. Rousseff will be impeached on allegations she used accounting tricks to hide Brazil’s budget holes. “Just getting rid of something very bad will start to make things better, and then we will see what comes next,” said Leonardo Monoli, a partner at Jive Investments in São Paulo, a $200 million fund-management firm invested mostly in distressed debt. Ms. Rousseff has denied wrongdoing and described the impeachment drive as a coup attempt by conservatives who disdain her government’s focus on the poor. In speeches, she has blamed Brazil’s downturn on global economic troubles, saying its crisis would be worse had her government not funded important welfare and stimulus measures. Brazil has wobbled between economic booms and busts for much of the past century. What helps it now its cushion of $374 billion in central-bank reserves. And unlike in some past crises, government debt is mostly in its own currency. In past decades, Brazil’s heavy borrowings in dollars became difficult to pay back when its currency crashed; that is less of a risk now. All the same, debt is a growing problem. During a decadelong commodity boom, Brazil’s federal government, major companies and even credit-card-wielding consumers borrowed on optimism that the country, rich in iron, oil and soybeans, had locked in permanently higher growth rates. Brazil’s government debt tripled to around $1 trillion in the past nine years, central bank data show. Now the bill is coming due. Brazil’s debt amounts to around 67% of its gross domestic product. Brazil’s rising debt and slowing growth have prompted credit-ratings firms to cut Brazil’s bonds to junk status, as economists are predicting that ratio may rise to 80% by 2017. Part of the problem: Brazil’s budget shortfall of 10% of GDP is so big the country must borrow money to meet payments on what it already owes. Brazilian companies are also struggling with debt. Corporate borrowing rose more than threefold to around $290 billion between 2002 and 2015, according to the Bank for International Settlements. Several firms embroiled in Brazil’s corruption scandal, such as engineering firm Grupo OAS, have declared bankruptcy. Others firms not involved in the scandal are facing hard times, too. On March 18, the heavily indebted steelmaker Usiminas said it would suspend some loan payments to banks. Standard & Poor’s declared the firm in default. Phone company Oi SA said Thursday it lost $1.24 billion in the fourth quarter. Its payments to service debt tripled in 2015 compared with 2014, the firm said. Aspiring working-class consumers who helped drive the domestic economy during the boom are now straining under credit-card debt. A record 54.1 million Brazilians were behind on loans totaling some $60 billion at the end of 2015, according to the credit-rating company Serasa Experian. The slowing growth and rising debt have put Brazil on a precarious path, and the deepening political impasse is making it harder to turn around, experts say. “The interaction between political crisis and the economic outcomes have become self-reinforcing,” said Samar Maziad, a senior analyst at Moody’s Investors Service who follows Brazil. _______________________________________________ pen-l mailing list pen-l@lists.csuchico.edu https://lists.csuchico.edu/mailman/listinfo/pen-l
