Rousseff contra la corrupción.

 

As Economy Stagnates, Brazil’s Rousseff Targets Corruption

By Sean Goforth, on 17 Jul 2013, Briefing

                

      

Since coming to office in January 2011, Brazilian President Dilma Rousseff has had to contend with annual economic growth slumping from 7.5 percent to 0.9 percent. Rather than introducing economic reforms—the president interpreted her mandate as one of continuing the policies set out by her predecessor, Luiz Inacio Lula da Silva—Rousseff’s team blamed a strong Brazilian currency for slow growth and nagging inflation. So, given that the value of the Brazilian real fell 10 percent against the dollar from May to June, reaching a four-year low, one would expect the government to be celebrating the new opportunity to export Brazilian goods at cheaper prices. Nothing could be further from the truth.

Certainly the real has weakened at a time of anemic growth, but whereas an economic slowdown often brings with it the silver lining of lower inflation, this hasn’t been the case in Brazil. Earlier this year inflation rose above 6.5 percent, the threshold set by Brazil’s central bank as the limit of what’s tolerable. In response, the central bank hiked benchmark interest rates three times, most recently on July 12, making Brazil the only OECD country to raise interest rates in 2013. Further hikes may be in the offing—a recent survey of economists suggests prime lending rates will near 10 percent by 2014—but so far the countermeasures show little progress in tamping down inflation.

Many of Brazil’s iconic businesses have already been squeezed by the combination of high inflation and the real’s swoon. Thanks to the cheaper currency, the state-owned energy giant Petrobras has been saddled with higher costs for imported equipment, and has seen its oil output steadily decline. Petrobras stock, which traded at $41 a share in the months after Rousseff entered office, now goes for $13.

Now, after a decade in which Brazilians’ expectations of a better life steadily rose, concerns are multiplying that the government has lost control of the world’s seventh-largest economy. Two years of low growth coupled with high inflation led London’s Telegraph and the Wall Street Journal, among other outlets, to warn of an era of Brazilian “stagflation.”

That was just before protests, initially over a 9-cent hike in bus fares, rocked Brazil in June. Commentators and major media fixated on corruption, bureaucratic red tape and profligate government spending for the upcoming 2014 World Cup as the primary grievances driving the marches that engulfed Brazil’s cities for two weeks. Still, the relationship between economic stagnation and June’s protests appears to be more than coincidence.

From May to June, as the real’s value plummeted and inflation inched upward, the rise in urban bus fares led more general increases in Brazil’s consumer price index. It stands to reason that many Brazilians interpreted the hike in bus fares, which was attention-grabbing if not particularly onerous, as the first sign of a new round of price hikes on food, electricity and other essentials. As one protester told Bloomberg, “We feel inflation every day, in our medical bills, in education, in the food we buy.”

Nonetheless, in responding to the protests, Rousseff quickly focused on remedying graft as the most urgent priority. On June 24, she met with protest leaders and pledged a spate of reforms, including more severe penalties for corruption and constitutional reforms. But instead of conveying responsiveness, Rousseff’s call for a constitutional assembly, along with her simultaneous calls for more social welfare spending but also more fiscal responsibility, suggested a naivete about what’s politically possible a year before a presidential election. Moreover, a true crackdown stands to incriminate members of Rousseff’s 17-party governing coalition, especially those in her own Workers Party.

Remedying graft may prove more difficult than Rousseff has acknowledged, but this doesn’t rule out reforms on other fronts where congressional action isn’t required. To this end, pressure has mounted on Rousseff to fire her holdover finance minister, Guido Mantega. Beginning in 2009, Mantega gained international notoriety by crafting a narrative of Brazil as the victim of a “global currency war” that drove up the value of the real, thus sapping Brazil’s economy. So when Mantega announced an end to the currency war earlier this year, it could have been seen as a major climbdown.

Instead, Mantega claimed victory, arguing in February that after two years of middling performance Brazil’s economy was finally on “solid” footing, a claim that looks hollow in the face of recent economic news. Rousseff now has an opportunity to signal to foreign investors and protesters alike that the government is finally ready to enact long-neglected economic reforms by replacing Mantega with Alexandre Tombini, Brazil’s central bank chief.

Two weeks ago, Rousseff firmly ruled out sacking Mantega. Still, the pressure on her to do so is unlikely to abate, especially if she cannot jumpstart reforms for clean government. A poll in late-June showed that the government’s approval rating has dropped by half since the outbreak of the protests; even if those numbers are a blip, Rousseff’s aura of cool pragmatism has been exposed—she can no longer coast to re-election.

In the meantime, whether the real continues to trade at depressed levels, a lingering sign of a stagnant economy, or gradually regains value, Mantega remains discredited. To advance Lula’s vision, and bolster her own political fortunes, Rousseff may have to finally distance herself from his legacy.

Sean Goforth is an analyst at Wikistrat, a geostrategic consulting firm, and author of "Axis of Unity: Venezuela, Iran & the Threat to America" (Potomac Books, 2012).