Brazil: Rousseff tries to right Brazil's sinking economy amid political crisis
March 16, 2015
Five months after she narrowly won Brazil’s elections, President Dilma Rousseff’s second presidential term is off to a rocky start. The outlook for Latin America’s largest economy is deteriorating rapidly amid weak fundamentals and increasing political uncertainty. Economic activity and industrial production have followed uninterrupted downward trends since March of last year and inflation hit an over-nine-year high in February. On top of the challenge of boosting the ailing economy, Rousseff is facing increasing hostility in Congress and her approval ratings have fallen to an all-time low. Moreover, increasing criticism from the opposition and from Rousseff’s own allies may impede the government’s ability to move forward with its reform agenda.
At the heart of Brazil’s increasing political uncertainty is the corruption scandal at state-controlled energy giant Petrobras. On 6 March, Brazil’s Supreme Court announced that it had approved an investigation into of 47 politicians, including Senate President Renan Calheiros and President of the Chamber of Deputies Eduardo Cunha, in a multibillion-dollar kickback scheme. Calheiros and Cunha are high-profile members of the Brazilian Democratic Movement Party (PMDB), the largest party in Rousseff’s coalition government. In recent weeks, tensions have increased between PMDB and Rousseff’s Workers Party over the scandal. PMDB’s politicians have openly blamed Rousseff for their inclusion in the investigation and have stepped up criticism of Rousseff’s policies. On 3 March, Calheiros blocked a presidential decree for a partial rollback of payroll tax breaks. This is the third time in Brazil’s modern history that a president of the senate has rejected a presidential decree.
The increasing opposition in Congress threatens to derail the government’s attempts at economic and fiscal reform. Rousseff has been trying to push forward an overhaul of the country’s economic and fiscal policy to restore investor confidence and narrow the fiscal deficit. The fiscal adjustment plan, spearheaded by Finance Minister Joaquim Levy, involves a series of unpopular austerity measures centered on cutting spending and increasing government revenue. The agenda represents a departure from the Worker’s Party past priorities of increasing government spending and cutting taxes. Many of the proposed reforms still need to pass through Congress, which may be difficult given the current political climate. In addition, the government’s involvement in the Petrobras scandal, combined with the unpopular measures, have triggered large-scale protests.
Looking forward, Brazil’s economic prospects are worsening. Uncertainty is growing over the government’s ability to meet fiscal targets and analysts are doubtful that the economy will turn around quickly. The Petrobras scandal is expected to weigh on investment levels and has driven the real to an eleven-year low. In addition, the country is experiencing a severe drought and low commodity prices are anticipated to weigh heavily on export revenues.
At this point, it remains unclear whether the Rousseff government has the ability or support to turn around the economy. Taking recent developments into account, LatinFocus Consensus Forecast panelists have downgraded Brazil’s outlook for the fifth consecutive month. The panel now expects the economy to contract 0.6% in 2015, which is down 0.5 percentage points from last month’s estimate. For 2016, the panel sees GDP growth at 1.5%