As Brazil's economy is doing better, more doubts arise from the political setting

From a historic recession period to a major political crisis, Brazil has been a source of many uncertainties for the past few years. If the economy is today slowly recovering, the political instability remains the main source of doubt for international investors. Presidential elections are due in October 2018 but the unfolding is so far very unclear and none of the possible outcomes seems truly reassuring.

Judging by the numbers, Brazil’s recession, which started in 2014, has been the worst the country has ever known. In 2014, the country’s GDP reached 0.5%, while in 2015 and 2016, it decreased by 3.8% and 3.6% respectively. However, in September, Brazil’s Central Bank upgraded its growth prevision from 0.5% to 0.7% for 2017 and establishes an expected growth of 2.2% for 2018.

In September, inflation hit only 2.54% on a yearly basis. Prices have increased by 0.16% during the same month and by 0.19% in August. Since January, prices have gone up by 1.76%. This represents the lowest progression since 1998 on a January to September period. In 2015, the annual inflation was 10.67% and 6.2% in 2016.

To contain inflation, Brazil’s Central Bank increased its policy rate, reaching 14,25% by the end of 2015. As a consequence, the number of credits granted to businesses has dramatically fell down, leading to a decrease in production and investment. However, in July 2017, the policy rate was set below 10% for the first time since 2013 and it is now at 8.25% since September 6th.  

Even if those indicators may suggest that the Brazilian economy is stabilizing, it is necessary to look deeper into the country's structural issues.  

Brazil’s rigid economic structure is a source of frustration for international investors. As a commodity-dependent country, the decrease in commodity prices since 2013 has hit Brazil heavily. Over the past decades, the country made remarkable efforts in order to diversify its economy but it still keeps on relying over oil, iron ore and coffee exportations. And with high interest rates, financing export costs has proved more and more difficult in Brazil. Additionally, the slow bureaucracy and the lack of infrastructures, two trademark disincentives to investment in this country, have made investors turn their back on Brazil.

To make things worse, the economic recession has been followed by a high-scale corruption scandal in Brazil. In 2014, the beginning of judicial proceedings following the Petrobras scandal, also known as “Operação Lava Jato” or “Operation Car Wash”, triggered a profound crisis of confidence among the population and international investors. A wide network of corruption was discovered, from small businesses practicing kickbacks and tax fraud up to the national company Petrobras and leaders of the Workers Party allegedly accepting bribes on a regular basis. The investigations revealed an international scheme orchestrated by Petrobras officials. Through fake businesses and private funds, they diverted public money and paid bribes to politicians during many years. The total sum involved is estimated at around five billion dollars.

The resounding consequences of the investigations have been illustrated by the impeachment of Dilma Rousseff in May 2016. Right after her destitution, her predecessor Lula was convicted to a nearly 10-year jail sentence for allegations of corruption and money-laundering. Two years after the beginning of the investigations, the leaders of modern Brazil had been ousted from power by the judiciary.

The case has clearly undermined Brazil’s recovery and cast a doubt over the credibility of the whole political class in the country. Michel Temer, who took over as interim president when Dilma Rousseff was impeached, has himself been the target of corruption charges. 

Indeed, Michel Temer took office in August 2016 with the ambition to put Brazil back on track. His reform plan consisted of several consequent budget cuts in order to reduce Brazil’s deficit. The bold pension reform is probably the most significant one, but also the most unpopular and difficult to pass. One year after, Temer’s government is still struggling to get this reform passed. Even more so as the President’s credibility has turned into dust since he has been accused of obstructing justice and racketeering in the Petrobras scandal.

On October 24, the Lower House of Congress rejected a vote on whether Michel Temer should face trial. The deputies probably opted for political stability.

With one year to go before the presidential elections (due in October 2018), Brazilians’ growing defiance towards the political class makes the outcome maybe more unpredictable than ever. Despite charges and allegations pending against him for corruption, Lula still benefits from a consequent sympathy capital. He is currently credited of a 30% approval rating, making him the favourite in the presidential race. The question surrounding Lula’s candidacy remains as the charges he faces could still be turned into a jail sentence. If Lula continues to benefit from a strong popularity, it is mainly because he was President at the best of times in Brazil. During his two terms, the social and economic policies implemented made Brazil one of the most promising developing countries in the world. Extreme poverty was reduced significantly and many households were able to increase the ranks of what is now a wide middle-class.

But things have changed and the progress the country has made over the past fifteen years seems to have been ruined by poor political practices. Since 2011, GDP per capita has decreased by more than 34% (from 13,167 US dollars in 2011 to 8,649 US dollars in 2016) and the country's unemployment rate is just starting to decrease after hitting a record 13.7% in March 2017. For some Brazilians, Lula is the only one able to solve the country's issues. But for others, he is somehow responsible for this situation.

Although he is backed by a fair part of the population, Lula's election - if he can actually run for President - is still unlikely. The Petrobras scandal and its proceedings have highlighted how impartial the Brazilian judiciary had been since day one of the investigations. This has been clearly acknowledged by Brazilians as a real step towards more transparency and less corruption. In this context, the election of Lula would ultimately represent a major backlash on Brazilians' fight against impunity.

Other declared candidates include notably social-democrat Geraldo Alckmin. The current governor of Sao Paulo lost against Lula in the run-off to the presidency in 2006. His substantial political experience could either be a good or a bad asset for his candidacy, as Brazilians have voiced their will to fully renew the political class. From the same party as Geraldo Alckmin (SPDB), Sao Paulo mayor Joao Doria is a rather new face in Brazil politics. His anti-elite speech has earned him a steady popularity. This is why he is tipped to be present in the final race. Finally, Jair Bolsonaro, a far-right populist is also running for President. His soft gun policy and more generally, his security-related rhetoric tend to resonate within lower classes while crime rates have increased worryingly for the past years in the Northeastern areas of the country.

Brazil 2018 election is for the moment very unpredictable and the follow-up in the "Car Wash" judicial proceedings will probably determine the names of the final candidates.