Brazil's Political and Economic Nightmare Continues

Just when it seemed that the situation in Brazil could not get any worse, developments in recent weeks suggest that Brazil’s downwards spiral could be continuing and that 2016 could be yet another devastating year for Latin America’s largest country. On the political side, the series of scandals highlighted by the massive Petrobras scandal continue to widen, as many of Brazil’s best-known political leaders have been implicated in one or more of these scandals. On the economic side, Brazil’s recession continues to worsen as Brazil now has one of the world’s worst performing economies. Last year, it was widely believed that 2016 would be a year of recovery for Brazil. However, those hopes are quickly being dashed and this year may prove to be even more difficult than 2015. In recent years, Brazil has been rocked by a number of high profile corruption scandals that have cost the leftist government of President Dilma Rousseff most of its credibility and support. The largest and most damaging of these scandals has been the Petrobras scandal, in which Brazil’s state-owned oil giant has been accused of paying huge amounts of bribes to many of the leaders of President Rousseff’s Workers Party. Last week, former President Luiz Inacio Lula da Silva, the current president’s predecessor and one of Brazil’s most popular political leaders, was briefly arrested in connection with the Petrobras scandal. Moreover, many other key figures have been arrested, or are being investigated, in connection with this scandal. As a result, President Rousseff and her government have seen their approval ratings plummet, with recent polls showing the president’s approval rating to be less than 10%. This has led to a loss of faith in Brazil’s government and its political system, adding to the sense of desperation in Brazil. While Brazil’s political problems may be severe, the country’s economic problems are proving to be an even greater threat to Brazil’s future. In the fourth quarter of 2015, Brazil’s economy shrank by a massive 5.9% on a year-on-year basis, the seventh consecutive quarter in which the Brazilian economy contracted on a year-on-year basis. Overall, the Brazilian economy shrunk by 3.8% last year, the worst performance for the country’s economy in 25 years. In fact, Brazil’s economic output has shrunk to mid-2012 levels as falling commodity prices and lower levels of business, consumer and investor confidence have combined to devastate an economy that just six years ago was growing by more than 7.5%. Now, with Brazil’s economy forecast to shrink by an additional 3.5% this year and by 0.5% in 2017, Brazil is in the midst of its worst economic crisis in more than three decades. Without a major improvement in the external economic environment or in Brazil’s economic competitiveness, the country will struggle to emerge from this severe downturn and it will fall behind many of its emerging market competitors. Amazingly, as bad has the political and economic situation in Brazil is today, it could still become much worse in the months ahead. Politically, the Petrobras corruption scandal could continue to bring down many of the most powerful members of the government and could eventually force President Rousseff from office. Moreover, her government is unlikely to recovery from its dramatic loss of support and this will hamper its ability to enact needed political and economic reforms. Economically, Brazil’s recession is forecast to remain deep throughout 2016 and to remain in place until sometime later in 2017 or even 2018. This will cause major hardships for millions of Brazilians and further reduce business, consumer and investor confidence levels in Brazil. Meanwhile, as the country teeters on the brink of collapse, the world’s attention will be focused on Brazil this summer, as Rio de Janeiro will host the Summer Olympics in August. Unfortunately, most of the news from Brazil in 2016, apart from the Olympics, will be negative.