2017 and 2018: Where is Brazil going?

It is not possible to talk about Brazil's prospects for 2017 and 2018 without taking into account the main developments from previous years that have led to the current big economic and political challenges.

At the beginning of this decade, the Brazilian economy grew and poverty declined. At the same time, unemployment went down and the purchasing power of the population increased.

The sensation of improved standards of living and well-being, as well the  perception of positive prospects for the future had already been outlined since the second half of the previous decade. These were the factors that allowed the strengthening and consolidation of the left-wing Workers’ Party (PT) government, which won the 2002, 2006, 2010 and 2014 Presidential elections.

The PT thrived on the basis of its political platform that consisted of; social programs dedicated to the poorest layers of the population; incentives for consumption nationwide; clear support towards specific groups of Brazilian companies (the so-called ‘national champions’ from different areas identified by the government as priorities).

These policies included not only the granting by the federal government of special conditions for certain sectors to increase their supply of goods and services, but also the availability of cheaper credit to robustly grow the demand for goods and services in general (sales of automobiles, real estate and international travel hit record highs and so did demand for more expensive food and clothing).

The bill for these generous policies appeared in early 2014, when it became clear that this artificial process of government fueled growth was exhausted. In that year the general elections demonstrated the division of the country regarding that economic model: 51.6% of the votes went to the PT candidate Dilma Rousseff, and 49.4% stayed with opposition leader Aécio Neves.

By assuming her second term in January 2015, Dilma Rousseff was already carrying the burden of unadjusted public accounts, lack of competitiveness of many Brazilian products and indebtedness of many consumers.

The budgetary problems had already prompted the government to create mechanisms aimed at avoiding a further worsening of the macroeconomic scenario. An example: the exchange of financial resources between different government departments to momentarily bail out one of them. This tactic is prohibited by the legislation but was practiced several times.

This governmental behavior led the Brazilian Congress to open a process of impeachment that removed Dilma Rousseff from power and put vice president Michel Temer in her place.

Temer quickly changed the economic team which is now trying to reverse the negative numbers resulting from the exhaustion of the Workers’s Party (PT) model that led to an anabolic (and not sustainable) growth of the Brazilian economy.

The numbers show the size of the problem: in 2015 economic activity fell 3.8%, and 2016 is estimated to record a additional decline of around 3.5%. This is an unprecedented fall for two consecutive years of the national economy. For 2017 the outlook is conservative, with economists and analysts generally estimating the country’s growth between 0.5% and 1.0%. The unemplyment rate went up from 6% to 12% in less than two years.

But if this is the economic scenario (in addition to the challenges of the federal government, several state governments are struggling to manage their finances), the political landscape is equally sensitive. Dilma Rousseff’s impeachment could have cooled the political-partisan debate, but ongoing investigations into corruption involving large national companies and well-known politicians in federal, State and municipal governments has kept the temperature high.

With the interruption of the strong governmental interventionism during the PT years, new measures are being adopted to promote economic recovery and the creation of jobs, such as:

  • The limitation, based on recently approved legislation, of the expenditures of the federal government, as well as the gradual elimination of the public deficit;
  • The restructuring of the debts and management processes of the regional governments, which were also in a bad financial situation;
  • Changes in labor legislation (which currently penalizes companies through high costs) and the Social Security system (main responsible for the governmental deficit);
  • Reducing interest rates to boost the economy.

The government of Michel Temer has already defined itself as “reformist”, in the sense that some changes that are currently being introduced aim to lead the country to better economic, political and social conditions before the next presidential elections of October 2018 (one positive economic indicator is the annualized inflation rate that was around 10% in the first half of 2016 has dropped to less than 7% – and continues to diminish).

But there is something else that can shuffle the cards one more time and lead to a new change of the game: the Supreme Electoral Court (TSE) is expected to rule on a lawsuit related to the accountability of the Dilma Rousseff-Michel Temer coalition team regarding their campaign for the October elections 2014 (part of the money used in the campaign is suspected to be of illegal origin).

If irregularities are proven and Michel Temer is considered as responsible for them as Dilma Rousseff, he may also be subject to impeachment procedures. It would be a unique situation in the history of the country as in this case the Brazilian Congress would be in charge of electing a successor to run the Presidency until the end of 2018.

In summary, 2017 promises to elicit strong emotions.