Brazilian engine sputtering


Strong domestic consumption, high commodity prices, intensive imports by China and strong growth in Brazil: those have been, in general terms, the engines of Argentine progress in recent years, when the national economic machine still worked.

The domestic market now falls because of high inflation, deterioration of the purchasing-power of wages and unemployment starting to rise. Soybean is no longer what is used to be.

China grows, but not enough to push the developing world up. Brazil, finally, is a big problem.

Estimates of the Brazilian Central Bank say that the economy will end this year with 0.2 percent growth, if we can call that “growth.” The country appears to have fled from recession but its productive activity dangerously resembles a flat electroencephalogram. Next year will be better, but not that much: 0.8 percent according to the same projections, an average of bank and market forecasts.

This is bad news for Argentina, trapped in its own labyrinth and unable to get better by its own impulse. Something especially negative in an electoral year, in which financial prospects are also worrying.

Can we expect some relief from Brazil, our huge neighbour? Let us see.

Inflation, again within the BCB target, will remain at around 6.5 percent in that country. But the subject became very relevant during the last presidential campaign. Official promises to reduce it and indications that the Central Bank will recover a greater degree of autonomy do not seem to point to a strong focus on production and demand recovery.

Any reactivation process will depend on the most important bet of Brazilian president, Dilma Rousseff: her major infrastructure plan, both aimed to create quickly economic activity and to overcome bottlenecks in production and domestic exports. But this will prove problematic too, this time because of the unprecedented corruption scandal in Petrobras.

As we already know, some of the most important Brazilian construction companies are involved in this case, from Camargo Correa and Queiroz Galvão to OAS and Engevix. Some of their top executives went to jail on Friday, November 14. Other major contractors, it is said, are also targeted by investigators. For instance, as a consequence of the allegations, Camargo Correa has begun to analyze its definite withdrawal from arrangements with the Brazilian federal government.

It is obvious that the scandal will at least slow down the activities of those big firms, whose directors need today to find a way out of the judicial threat more desperately than thinking in business terms.

Furthermore, investigators have found unusual money movements of more than nine billion dollars around Petrobras and some suggest that similar scandals could explode when the prosecutors take a look at the accounts of the Brazilian power companies.

What will happen now with the contracts between Petrobras and the investigated companies, which total 22 billion dollars?. Rousseff’s government guarantees that they will go on as expected, but this is very difficult to believe, given the political environment of these days.

If those contracts are paralyzed, as is quite probable, who will take the place of the companies in trouble?

O Globo newspaper has said that optimists within the government think the time has arrived to open the door to medium-sized and even small companies traditionally excluded from the “contractors club.” But this will also be problematic.

Those smaller firms do not have access to international credit on the same terms as the big ones. Thus they will depend on domestic loans given by state agencies and banks. Let us remember that this has not been the policy of the PT administrations from 2003, something very controversial during the campaign. Why has the BNDES development bank supported big companies, with access to the international markets, instead of the smaller ones?, Rousseff was asked. She never gave a convincing answer.

Besides that, the deterioration of Brazil’s economic figures has created the possibility of rating agencies downgrading the national debt, which would make the money for both the government and the companies more expensive. Bad news for the medium-sized and small infrastructure firms.

We can add to the problems mentioned above the loss that Petrobras will be forced to assume because of the scandal, a figure estimated this week by Morgan Stanley analysts at 8.1 billion dollars. A heavy blow to the emblematic state-controlled oil company, whose recent losses in the Ibovespa led it to resign first place among Brazilian companies for the first time to AmBev and Itaú Unibanco.

Rousseff’s margin of action is not consistent with that expected for a president who has just won re-election. She will probably feel forced to yield to the financial markets more than she initially wanted, something about to happen when this article was being written in terms of naming her next economy minister.

Priorities have changed for her. In another bad piece of news for the Brazilian economy (and Argentina’s), Rousseff has shifted her main focus from productive recovery to political stability. She desperately needs to get away from the Petrobras scandal, which still has more surprises in reserve, and, especially, a new chapter with dozens of government-related politicians seriously involved.

Rousseff will find it more difficult to pass through an already rebel Congress new legislation to accelerate her infrastructure plan, which, as we have already said, is key to the country’s future. Many legislators will doubt a lot before voting for bills which for a long time will draw public suspicion.

Many of them could even show reluctance to be a part of the government base in Congress when all those alliances are covered by a dark mantle.

It seems that Argentina will have a much better outlook if it looks after itself, if it finally face its real problems. Inflation, the vulture fund threat, the shortage of hard currencies, etc. The world has little to offer for now.

(Nota publicada en el Buenos Aires Herald).