President Dilma Rousseff's approval rating plummeted from 46% to 12% in her first three months in office due to an economic crisis and political mistakes. A "perfect storm" of factors including corruption scandals, budget cuts, and growing protests have greatly weakened Rousseff's administration and agenda. While calls for impeachment and military intervention have emerged, Brazil's institutions remain intact and most experts believe the situation will ultimately be resolved through existing constitutional means. However, the political and economic outlook for Brazil remains uncertain.
1. Brazil 2015
A Perfect Storm
Derails President
Rousseff’s Agenda
Afteronlythreemonthsinoffice,PresidentDilmaRousseff’sapprovalratingfellfrom46%inOctober
to just 12% at the end of March, according to national polls conducted by Ibope. The reasons for the
decrease are due to a so-called “perfect storm” – a combination of an economic crisis and political
mistakes that fueled the mobilization of various sectors of society in large demonstrations in the
main cities of Brazil, demanding anti-corruption measures and impeachment of the President.
In this report, we analyze the factors that led to this situation and share an outlook for 2015
Introduction
The narrow victory recorded in the last presidential election in Brazil begins to explain why tensions, already high, have continued to
grow. In late October, 2014, President Dilma Rousseff (Workers’ Party or PT) was re-elected with 51,501,118 votes (51.64%) while
her opponent, Aécio Neves (Social Democratic Party or PSDB), received 51,041,155 votes (48.36 %), resulting in one of the closest
elections in Brazil’s history. The wide margin of victory in the North and Northeast states of Brazil offset the weak performance of
President Rousseff in the more modern and developed South and East regions. President Rousseff won in 15 states, with the largest
victories coming in areas largely served by welfare programs (such as Bolsa Família, a general social welfare program, Fome Zero, a
nutritional social welfare program, and Mais Médicos, a health social welfare program) created during the presidency of Luiz Inácio
Lula da Silva (2002-2010). Neves won in the South and Southeast (except for Minas Gerais and Rio de Janeiro), predominantly
in cities with populations over 500,000 people. Another shift occurred in the composition of the Brazilian Chamber of Deputies
(equivalent body to the U.S. House of Representatives), with the most conservative elements (composed of evangelical leaders,
large farmers and the military) gaining seats and a significant reduction of the left-leaning PT faction, which lost 18 deputies.
The electoral campaign was marked by mud-slinging between the candidates, both in free advertising airtime provided to all
candidates by law and on social media platforms. This tension intensified during the first three months of Rousseff’s presidency.
Before the election, Brazil had also experienced a near-crisis financial situation, and in October 2014 reported a cumulative inflation
of 6.75% in the previous 12 months, well above the target established by the Central Bank of 4.5%. At the same time, allegations of
corruption and bribery in Petrobras – Brazil’s largest company and a symbol of national pride and progress – have continued to grow.
The accusations began with the overpriced purchase of Pasadena, a U.S. refinery, when then Chief of Staff Rousseff was the chair of
the Petrobras board of directors. Beginning last fall and continuing through present day, the national “Operation Car Wash” scandal
(a code name used by investigators), a tangled web of corruption, politics and bribes that has become one of the biggest scandals in
Brazilian history, is turning public attention towards the nation’s top politicians as well.
2. First Measures
During the presidential campaign, President
Rousseff announced that she would replace the
finance minister, Guido Mantega, who had been
in government since 2002. She denied that policy
priorities would be changed and insisted that the
same focus on infrastructure investments, social
programs and labor rights would be maintained.
However, she proceeded to select a very different
successor for the position: the economist Joaquim
Levy, 53, who had previously held the position of
asset management director at Bradesco, the second
largest private bank in Brazil. A proponent of a more
liberal economic policy, with less emphasis on state
intervention and more on free market leanings, Levy
had also been head of the National Treasury during
the first Lula government, when he became known
as “scissorhands” because of his policy of frequent
budget cuts and other fiscal adjustments. The
announcement angered part of President Rousseff’s
electorate as well as various members of the new
ministry, many of whom had very conservative
and more state-interventionist leanings. To further
dampen the mood, the courts ordered the arrest
of several executives and employees of the major
Brazilian construction companies, including OAS,
Camargo Correa, Odebrecht, Engevix, UTC and
Galvão Engenharia, who were suspected of bribing
politicians as part of the Car Wash investigation of
Petrobras. The list of suspects have included several
current senators and deputies registered with the
PT party and their political allies.
Possession
President Dilma Rousseff took office for a second
term on January 1, 2015, in an atmosphere of
distrust because of a faltering economy. In the first
two weeks, Finance Minister Levy announced a
federal budget proposal for 2015 which aimed to
eliminate close to R$ 60 billion (US$ 20 billion)
of public spending in order to achieve a surplus of
1.2% of GDP at the end of 2015. Among the large
budget cuts proposed were reductions of social
and labor protections and benefits, making it more
difficult to obtain unemployment insurance, sick
pay and even death benefits. The government
also proposed changes to the popular educational
program FIES, reducing the availability of public
funding to lower-income students at private
universities. As dissatisfaction with her leadership
grew, Rousseff opted for discretion and shied
away from public events and media exposure.
Unfortunately, for her, this gave the growing
opposition an opening to publically accuse the
President of violating a key campaign promise and
influence perceptions of her new administration.
Political Opposition
In February 2015, President Rousseff also suffered two serious setbacks
during the election of the new President of the Chamber of Deputies and the
President of the Senate, the country’s two main legislative bodies. The major
defeat happened in the Chamber, with the conservative and evangelical deputy
Eduardo Cunha, from Rio de Janeiro a vocal opponent of President Rousseff’s
administration, winning the position of President of the Chamber of Deputies.
In the Senate, Renan Calheiros was re-elected for another two-year term as
President. Although both men belong to the PMDB party, which is mostly allied
with the government’s power base, both are committed to more conservative
ideas and factions in Brazilian politics – a group that was already dissatisfied by
the lack of dialogue between the leadership of the legislative houses in recent
months. With the newly elected leadership in place, the operation of the federal
government’s legislative bodies slowed, stalling the passage of key proposals
championed by President Rousseff, including the new federal budget for 2015.
Big Oil and its effects on
Petrobras and the President
Petrobras, the state oil producer and the largest company in Brazil, was
severely shaken by allegations of corruption and bribery triggered by the code-
named Operation Car Wash investigations by Federal Police and the attorney
general. The corruption scheme involved former directors of Petrobras, money
launderers, contractors and politicians from various parties. The scandal
escalated to the point that the company had to postpone the release of its
annual financial results until new liabilities from the corruption scandal were
accounted for. The stock value plunged and resulted in billions of losses for
shareholders in Brazil and abroad. Dozens of international private equity firms
and other financial institutions have already filed legal petitions claiming that
Petrobras executives knew of the corruption scheme and therefore certified
false financial statements for years, impacting the value of their investments.
The expectation is that these write-downs will be between R$ 20 billion and R$
40 billion (US$ 7 to 13 billion) at a minimum.
The Petrobras scandal affects much of the country’s infrastructure sector due to
thereportedkickbackschemebetweentheStateandmaincontractor.Politically,
the Federal Supreme Court (STF) authorized the opening of an investigation of
47 political suspects, whose names appeared in the testimony of several money
launderers and other individuals arrested in the operation that have cut deals
in exchange for information. The name of the PT party treasurer, João Vaccari
Neto, is among those implicated, as is the recently elected President of the
Chamber Eduardo Cunha and President of the Senate Renan Calheiros, creating
another round of national outrage and disgust amongst the public of the current
political leadership in Brazil. As the scandal continues to unfold, a narrative
depicting pervasive, long-term and systematic abuses of power by the ruling PT
party and its operatives has gripped the country, media and rallied opposition
from both the lower and middle socioeconomic classes.
In the face of this chaotic scenario, the protests against corruption involving
Petrobras and President Dilma Rousseff have grown with each passing day, with
some even calling for her impeachment (though the Brazil constitution does not
provide a mechanism for impeachment). Some are calling for the military, which
maintains a high degree of trust with the public, take control of the country’s key
institutions, remove the corrupt political parties and their representatives, and
manage a new round of democratic elections to begin to repair the country’s
political and economic condition.
Beyond the impact on Brazil’s largest company Petrobras, its largest
infrastructure companies and the chain reaction across multiple industries,
the largest repercussions could be felt in the overall Brazilian economic results
in the coming months. The most recent calculations by economists, based on
an estimated multiplier effect of the Petrobras scandal, estimate a decrease of
at least R$ 87 billion (US$ 29 billion) in international investment in Brazil. In
addition to this, it is estimated that approximately R$ 25 billion (US$ 8 billion)
in dividend payments to Petrobras shareholders will not take place this year due
to the financial condition of the company. The numbers continue to grow as
the scandal unfolds, as do the multiplying damages to Brazil’s economy and its
forecasts for the future.
3. Political Support Faltering
During the first 90 days of 2015, three national
ministers have already left their posts in the new
government. So far, the most controversial departure
was that of the Minister of Education, Cid Gomes,
whohelddiscussionswithindividualsintheChamber
of Deputies and announced his resignation even
before the results of the recent leadership elections
in the Chamber and Senate were announced.
According to a survey conducted by the Arko Advice
institute, 61% of deputies and senators consider the
relationship between President Rousseff and the
legislative bodies to be bad or terrible. The prediction
is that if the dialogue with the Senate and Chamber
doesn’t improve, it will further delay the approval of
the President’s policy priorities, including the already
long delayed 2015 federal budget proposal.
Economic indicators
In late March, the final 2014 Brazilian GDP growth
figures were published, ending at only 0.1% for the
year. Economists at major banks and consulting firms
polled by the Central Bank are already estimating
the GDP will contract in 2015 by -1%. Additionally,
inflation is forecasted to reach 8.2% this year, far
above public government target. As for the currency
value, the exchange rate is projected to be R$ 3.25 to
the US dollar in December 2015 and a basic interest
rate (Selic) of 13.25%. For comparison, at the start of
2014 the exchange rate was steady at R$ 2.3 to the
US dollar. The unemployment rate, though still low, is
increasing and, according to IBGE, rose from 6.5% in
November 2014 to 6.8% in January 2015.
To reassure business leaders, Finance Minister Levy
has participated in several meetings in which close
government and private collaboration has been
requested in order to fully implement the federal
budgetprogramandothereconomicpolicies,restating
that they are essential to meeting the 2015 economic
forecasts, maintaining the country’s investment grade
and the resumption of positive development in 2016.
Citizen Unrest
On the night of March 8, 2015, President Dilma Rousseff
made a radio and television announcement that sparked
an unexpected wave of nationwide protests. A large
mobilization on social networks urged citizens to bang
pots and pans together during the President’s speech as
a form of dissent; the sounds were heard, recorded and
posted online from many cities around the country. The
episode, which became known as the “pots and pans
protest” served to boost the subsequent demonstrations
on March 15 in more than 100 cities across the country.
Though there was a disparity in the reported number of
participants (in São Paulo either 230,000 or 1 million
protestors were present, according to the Datafolha
research institute or the military police, respectively) the
streets and avenues in dozens of cities were overtaken
by protesters – most middle class, wearing the national
colors with yellow and green clothing, calling for an end
to corruption, the impeachment of President Rousseff
and the return of morality in politics. No single party
commanded the protests, and no traditional political
leaders were present. However, research indicated that
the overwhelming majority of participants were those
who had voted for the defeated candidates Aécio Neves
and Marina Silva. The organizers were from nonpartisan
entities, previously unknown to public, such as Vem Para
a Rua (Come to the Street) and Revoltados Online (Online
Revolt). In all cities, the demonstrations were peaceful and
there were no reports of attacks or clashes.
4. Conclusion
The political situation in Brazil remains extremely
vulnerable. Former President Lula is believed to
be working to have popular social movements (his
“army,” he exclaimed in a leaked private meeting
video from his time in power) on the streets to
defend President Rousseff´s administration. The
environment will prove more challenging if the
so-called army of left-wing activists and union
members clashes with the increasingly disgruntled
middle class. If this happens, it could prove to be
a spark that ignites a national crisis and creates
significant change.
Some hope that this administration cannot complete
its term in power due to today’s circumstances. How
this could happen, however is uncertain.
While many wait for this potential scenario, the
obstacles facing the current government continue
to grow and weaken their political and economic
influence with each passing day. This is to say,
while the sky is filled with dark clouds from this
perfect storm, what will remain when it passes is
still a mystery.
Outlook
Despite the widespread atmosphere of dissatisfaction, there
remains confidence in the ability of Brazil’s core institutions to
function and manage through these current crisis. Acts against
freedom of expression or an erosion of public security have not
occurred. The media remains a strong, independent voice. The
Supreme Court, attorney general and prosecutors leading the
Petrobras investigation are being hailed as crusaders against
the current corruption in the country and working in the
interest of the nation.
Themostextremeproposalsputforth,suchastheimpeachment
of the President and transition to military control of the
government, are advocated only by small groups which have a
low level of representation and national influence. Chamber of
Deputies President, Eduardo Campos, has said the Chamber not
entertain requests for the impeachment of the President.
In the coming days, continued demonstrations against President
Rousseff are expected, likely without the participation of political
parties or significant national leaders to support their cause.
At 83 years old, the former President Fernando Henrique
Cardoso, also known as the “father of economic stability” in
Brazil, is still a respected voice within the opposition and the
media. Former President Cardoso has spared no criticism of the
current administration, but at no time has he signaled the desire
to return to public life.
His attitude differs greatly from that of former President Lula,
who has left open the possibility that he could return as a
candidate for Presidency yet again. However, he has remained
distant from the political crisis and has avoided a presence
at public events or media interviews.
According to analysts, this avoidance of the
spotlight appears to be a tactic of the PT itself,
to shield the former president and potential
candidate for the next elections, which
are scheduled for October 2018.
This is to say, while
the sky is filled with
dark clouds from
this perfect storm,
what will remain
when it passes is
still a mystery
Paulo Andreoli
Chairman MSLGROUP Latin America
and Global Board Member
Consultant MSLGROUP Latin America
Roseli Loturco