Brazil
and the IMF: together again? Oh yeah! says
no one.
The
left wing Workers’ Party (PT) rose to power thanks to the International
Monetary Fund. The public, sick of hearing about how the government had to pay
foreign lenders and didn’t have the money to pay to develop a poor economy,
voted out the ruling elites and voted in Luiz Inacio Lula da Silva, a union
rabble rouser he never went to college.
And
then, Lula kicked the International Monetary Fund to the curb when
Brazil paid the $15.5 billion it owed them in December 2005. No longer was
the government beholden to the designs of the Fund’s financial demands. It
become a net lender to the IMF instead.
To the
public, the Lula government gave Brazil its economic sovereignty back.
They hated the IMF and turned against the Social Democratic Party because
of it. Lula quickly became the most popular president in the Americas, if not
the world, based on his approval rating in the 80s. The government didn’t
default. It made good on its promise. The world was pleasantly surprised.
But 11
years later, a reversal of fortunes is occurring. The surprises in Brazil, for
the most part, have been consistently negative.
Lula & Obama
October
2002 Brazil was the equivalent of the U.S. in November 2008. Bedraggled and
beaten down by foreign debt, with pundits from Washington to São Paulo
predicting imminent defaults, union rabble rouser Lula clobbered the
establishment candidate Jose Serra and won the presidency in nothing short of a
landslide. Lula “peace and love” made new fans. The middle class in the
south voted for him in spades, even those who once thought Lula was a
communist. The native tribes waved red PT flags in canoes floating up the Para
River in the Amazon. It wasn’t an ideological battle at all. It was a battle of
common sense. Brazil was in the gutter. The leaders were failures. It was
Lula’s turn. Despite the fact the world worked in Lula’s favor, he still
managed to deliver.
In
2008, the U.S. was bedraggled and beaten down by a housing crisis that wiped
out untold billions in American family wealth. An unpopular war in Iraq pulled
the rug out from under the regime changers in the Republican Party, and a black
man raised by a single white woman was elected President with 53% of the vote.
Those who thought Obama was some sort of closet socialist were wrong. Despite
the fact that the Federal Reserve has propped up the markets for the past 8
years, Obama was in charge when the U.S. came out of the Great Recession.
Now the
pendulum has swung.
Seja Bemvindo IMF!
The IMF
is needed in Brazil “more than ever”, says Alicia Garcia-Herrero, a former IMF
economist and now chief economist Asia Pacific asset manager Natixis. “The
interim government has made progress with new fiscal targets, but it is neither
transparent nor credible and it will be impossible to implement in the current
circumstances of an interim government with a very low degree of acceptance by
the population,” she says.
Interim
government leader Michel Temer was the vice president of suspended president
Dilma Rousseff. Temer is part of the big tent Democratic Movement Party, or
PMDB. Party bosses, once close allies of the PT, conspired to remove Dilma from
power once it became clear she could do nothing to significantly stop the
political crisis resulting from the massive Petrobras bribery scandal. Dilma
faces a senate trial next month for supposedly cooking the books on fiscal
accounts.
What
does the debt look like?
Brazil’s
primary deficit rose to 2.5% of GDP in May, or -10% of GDP in nominal terms.
The new target for this year’s deficit is 2.6% of GDP, up from Dilma’s poor
guesstimate of 1.5%. The weak economy is taking in less in taxes and fees.
Due to
constitutional constraints, spending is highly rigid in Brazil and therefore
not easy to cut. Many of them are mandatory (social security) and
they lead to inflation. Inflation is over 8%, down from 9.5% in the first
quarter.
New
Finance Minister Henrique Meirelles said on Tuesday that Plan A to resolve the
economic crisis was to cut spending without harming popular social programs
like ‘Bolsa Familia’. Plan B was to start selling off state assets. And the
worst plan of all, Plan C, was an IMF style austerity program to raise taxes.
“The
willingness to raise taxes is less straightforward and there is no doubt
it needs to be done immediately,” says Garcia-Herrero. “An IMF program seems
like the right entry point for such unpalatable measures as it could be used as
a scapegoat by the government, basically blaming the Fund for the tax hike.”
Contingent
liabilities may arise from the government’s mega state enterprises, like BNDES
bank or Petrobras. The oil major is particularly vulnerable to massive lawsuits
in the U.S. and Brazil, and it has over $130 billion in debt.
Should
Dilma survive impeachment, the best case scenario would be for her to call for
new elections. If she stayed, a political stalemate is likely. And that makes
an IMF bailout package all the more relevant. The economy stagnates. No new
money comes into the government. The debt burden worsens. Someone is going to
have to clean up this mess.
“If
Dilma comes back then I think we basically stop and grind to a halt,” says
Chris Probyn, senior economist with State Street Global Advisors, a $2 trillion
asset manager in Boston. “Dilma would prolong the crisis and there would be
another big dose of uncertainty.”
State
Street has Brazil’s economy performing worse this year than last year,
making them one of the biggest bears on Brazil. Probyn has Brazil GDP
contracting by 4%. The IMF has it contracting 3.8% based on their World
Economic Outlook report from April. Brazil’s central bank sees it contracting
by 3.3%, based on a recent survey.
The Petrobras Scandal Is Brazil’s
Brexit
The
political noise in Brazil continues to delay progress. The war of words between
Dilma supporters and those looking to move on has not subsided. Temer remains
highly unpopular. His government is at least as fragile as Dilma’s with one
exception: congress likes him a wee bit better than her.
Reforms
are rhetorical. The market is hopeful, but that is it. If the IMF comes to
town, the mood might change for the worse.
FocusEconomics
said this week that it sees the economy recovering “meekly” next year, up 0.9%.
Eleven
years ago, when Brazil surprised the world and paid its IMF debt, the
country was on an entirely new path. The left wing Lula wasn’t going to be the
next Hugo Chavez. He was going to adhere to contracts with foreign lenders. He
could be trusted.
Of
course, the Petrobras scandal changed all that.
As the
migrant crisis led to Brexit and possibly a Donald Trump, the Petrobras crisis
could lead to the old days of a foreign institution telling Brazil’s government
how to spend its money.
Ironically,
one of the things the IMF praised Lula for was his adherence to the
government’s Fiscal Responsibility Law. This is the very law for which Dilma faces an
impeachment trial in the Senate in roughly four weeks.
Brazil
has done a 180. All it needs now is to return to 2002. And it just might if
Lula runs for office again. While his favorability ratings have plummeted,
Brazil’s leadership hole makes him the only known politician with a spattering
of good will left among a decent portion of the population.
Yet,
just as Lula kicked the IMF out of Brazilian politics, the Petrobras scandal
may yet kick Lula out of it too. Lula running to the IMF would be
sacrilegious. For other politicians, it’s a scapegoat…and unless Brazil grows
next year, it may be a lifeline.
Kenneth Rapoza
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