Americas / Brazil

The Nearing Cliff

Little American media attention was drawn to the recent October Brazilian presidential elections. The debate at hand was whether or not to continue with the left-leaning policies of the majority party, the Workers’ Party (PT), or support the slightly more business-oriented and conservative policies of the leading minority party, the Brazilian Social Democracy Party, a center-right leaning party. That battle was waged most clearly in the presidential race between Dilma Rousseff of the PT, Brazil’s president since 2011 and first female president, and Aecio Neves, leader of the Brazilian Social Democrats. In a heated election, one in which corruption allegations, mismanagement accusations, and personal attacks were common, President Rousseff and the Workers’ Party won the election in the second round ballot. With Ms. Rousseff winning 51.6 % of the vote to the 48.4% won by Mr. Neves, it was the closest election in Brazilian history and marked by a distinct divide in the voters.

While much of the poor North and Northeast of Brazil voted for Ms. Rousseff on the grounds of the PT’s popular social programs and the insistence that Mr. Neves would abolish these programs, the richer areas of the South and Southeast were won by the more business friendly policies of Mr. Neves. For example, in Sao Paulo, were approximately 20% of Brazilians hold residence and where about 33% of Brazil’s economy comes from, Mr. Neves won 64% of the vote compared to 36% won by Ms. Rousseff.

The less than resounding victory by the PT and Ms. Rousseff shows that that Brazil is not pleased with its politicians. In an area of the world where political machinery and patronage often carry the day and where only three Latin American presidents have lost reelection bids in the last thirty years, to have such a close result is a signal that change must come soon.

Much of the close result revolves around the struggling Brazilian economy. As the seventh largest economy in the world and the second largest in the Western Hemisphere, Brazil was pegged to emerge as a new great power. One of the BRIC nations, Brazil boasted an economy open to business, leading to strong foreign investment. While chronic poverty in Brazil has been reduced under Ms. Rousseff and unemployment throughout the country is approximately 5%, the economy has not grown since her election in 2011. For starters, The Economist reports that inflation currently runs barely even with growth in wages, running at approximately 6.7%. Output also fell approximately 2.4% at an annual rate from April to June and the Brazilian economy has seen a retraction in growth over the past two quarters, signaling a recession.

Furthermore, Brazil is hampered by structural problems, such as poor infrastructure and excessive bureaucratic maneuvering that has caused many to believe that Brazilian politics are as convoluted as any. Ms. Rousseff and the PT, for example, have been accused of corruption for the government’s cozy relationship with Petrobras, Brazil’s state oil company. Petrobras, for example, has seen the recent corruption scandal widen in its scope, as the Wall Street Journal reported in November that many of Petrobras’ executives are under investigation on allegations of bribery and money-laundering schemes. It could severely undermine Ms. Rousseff’s economic plans and further hinder her second term as president.

The world did not take kindly to the election results in Brazil. Immediately following Ms. Rousseff’s victory, The Wall Street Journal reported that Brazil’s stock market fell to a six-month low. Investors are not buying Ms. Rousseff’s claims that Brazil’s economic downturn is due in large part to the global downturn, as many see her policies as ill advised. The Economist, for one, took the stance that Ms. Rousseff’s state-centered policies will do little to solve the issues at play. Many also are hesitant at the moment to invest in Brazil’s future until a new finance minister is appointed, as Ms. Rousseff’s ambiguous plans for future growth have not found many receptive ears. Ms. Rousseff also may have to deal with an impending credit downgrade. In March of 2014 Standard & Poor’s rated Brazilian bonds as one grade above junk status, but they may be downgraded further in the coming weeks due to the market’s lack of faith in Ms. Rousseff’s ability to lead Brazil out of recession. A downgrade to junk bond status would further scare foreign investment from Brazil. Brazil would be forced to borrow at a higher rate, cutting out domestic investment in capital stock, raising interest rates, and thereby reducing demand for goods. All of this could threaten the very unemployment rate that Ms. Rousseff and the PT claim as a sign of imminent growth and prosperity.

There is also another issue at play, one that will become more prevalent in the coming 18 months. The cost of hosting the 2016 Olympics in Rio will be astronomical. Brazil has already hosted a worldwide event this past summer. The 2014 World Cup was a stirring sporting success wrought with political unrest and exponentially large costs. The cost of refurbishing and building new stadiums ran well beyond what was initially estimated. Bloomberg, for example, had stated as early as May 2013 that the cost of the World Cup would realistically amount to approximately $15 billion, well above the proposed limits. The new stadiums, for example, cost the Brazilian public an estimated $4.2 billion according to CNN.

The amount of money thrown into putting on an event of this magnitude, one that furthered divided the haves and the have-nots in Brazil, created social and political unrest. Anarchist movements sprung up, in addition to peaceful protestors, all of whom wanted the money being raised to go towards public works that all could use, not just public works that only some would ever see the inside of. Protestors were calling at that point for Ms. Rousseff’s resignation. Although the protests have died down for the time being, it is highly probably that these same protests will rise up again, as the costs for the Rio Olympics will surely rise beyond their estimates. Bloomberg reported in January that the estimated $2.3 billion in infrastructure costs were expected to increase, and reports in April of 2014 by The Guardian spoke to the growing fear that Rio would not be ready to host the event and that in its haste, costs would rise even further.

There is a misconception that the Olympics and large sporting events of its kind bring in massive amounts of revenue for the country hosting. They tend to do the opposite. The New York Times wrote in August 2014 about this notion and found that in most cases that there was, “little evidence that such events increase tourism or draw new investment”. Furthermore, Olympics that have drawn in high revenues, such as the Los Angeles Olympics in 1984, did not have exponentially large infrastructure costs like Brazil will surely have. In short, Brazil’s hosting of the Rio Olympics may be a sign that it wants to be on the world stage, but it will not bring in large amounts of revenue or investment that Brazil so desperately needs.

It is vital that Ms. Rousseff establishes a strong economic plan for growth. Brazil sits precariously on the ledge of losing its standing as an emerging economy power. It has much potential but must curb rising inflation and improve its infrastructure, among other things. It has spent far too much money on white elephants that do not benefit the public. Brazil must also reduce its holding within Petrobras. Energy remains a large part of Brazil’s future, but the state’s heavy hand in Petrobras, one of the largest energy companies in the world, has made foreign investors wary, resulting in Petrobras’ continuously dropping stock price – nearly 15% over the past year – and a fall in profits. There are structural deficiencies that Ms. Rousseff and the PT must address. Theirs may be the party of the people, but the people will not support them for long if Brazil’s economy remains rudderless.