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As a Boom Fades, Brazilians Wonder How It All Went Wrong | As a Boom Fades, Brazilians Wonder How It All Went Wrong |
(14 days later) | |
BRASÍLIA — The president of Brazil should have been ecstatic. She had just won re-election after an intense campaign in which she fiercely defended her role in making Brazil, for a few fleeting years, a rising star on the global stage. | BRASÍLIA — The president of Brazil should have been ecstatic. She had just won re-election after an intense campaign in which she fiercely defended her role in making Brazil, for a few fleeting years, a rising star on the global stage. |
But in the days after her victory last October, President Dilma Rousseff was worried, confronted in private deliberations with her closest advisers by signs that Brazil’s triumphs were at risk of coming undone. | But in the days after her victory last October, President Dilma Rousseff was worried, confronted in private deliberations with her closest advisers by signs that Brazil’s triumphs were at risk of coming undone. |
“We went too far,” Aloízio Mercadante, Ms. Rousseff’s chief of staff, acknowledged publicly this month, describing the sense of alarm as the dust settled after the election and Ms. Rousseff and her aides grappled with the weaknesses in Brazil’s economy. | “We went too far,” Aloízio Mercadante, Ms. Rousseff’s chief of staff, acknowledged publicly this month, describing the sense of alarm as the dust settled after the election and Ms. Rousseff and her aides grappled with the weaknesses in Brazil’s economy. |
It was not just the drop in global prices for Brazilian commodities like iron ore, the slumping demand in markets like China, or even the brewing corruption scandal at the national oil company that was hurting the country. Ms. Rousseff’s own economic policies were taking a toll, too, officials concede. | |
Now, an economic crisis is unleashing a withering national exploration of how Brazil squandered its hard-won success. | Now, an economic crisis is unleashing a withering national exploration of how Brazil squandered its hard-won success. |
Highlighting the strain, Standard & Poor’s downgraded Brazil’s credit rating to junk status on Wednesday, igniting a broad sell-off of Brazilian financial assets on Thursday. The blow is expected to increase Brazil’s borrowing costs while focusing even more scrutiny on the government’s inability to rein in public spending. | Highlighting the strain, Standard & Poor’s downgraded Brazil’s credit rating to junk status on Wednesday, igniting a broad sell-off of Brazilian financial assets on Thursday. The blow is expected to increase Brazil’s borrowing costs while focusing even more scrutiny on the government’s inability to rein in public spending. |
“We were putting off our date with reality,” Carlos Langoni, a former chief of Brazil’s central bank, told reporters after the downgrade. “Now is the time to do it.” | “We were putting off our date with reality,” Carlos Langoni, a former chief of Brazil’s central bank, told reporters after the downgrade. “Now is the time to do it.” |
Newcomers to the fragile middle class are fuming as the economy hemorrhages jobs and interest rates soar. The Federal Court of Accounts, an auditing body tied to Brazil’s Congress, is examining whether the president improperly used funds from giant state banks to shore up the federal budget. | Newcomers to the fragile middle class are fuming as the economy hemorrhages jobs and interest rates soar. The Federal Court of Accounts, an auditing body tied to Brazil’s Congress, is examining whether the president improperly used funds from giant state banks to shore up the federal budget. |
Fighting to keep her job as calls for her impeachment intensify, Ms. Rousseff has even issued a rare mea culpa, saying she experienced a series of “scares” shortly after her re-election as the crisis grew far more serious than she had imagined. | Fighting to keep her job as calls for her impeachment intensify, Ms. Rousseff has even issued a rare mea culpa, saying she experienced a series of “scares” shortly after her re-election as the crisis grew far more serious than she had imagined. |
“The Brazilian model celebrated just a few years ago is turning into a slow-motion train wreck,” said Mansueto Almeida, a prominent commentator on economic policy. “Our political leaders want to point fingers at China or some external villain, but they cannot escape the fact that this self-inflicted crisis was made in Brazil.” | “The Brazilian model celebrated just a few years ago is turning into a slow-motion train wreck,” said Mansueto Almeida, a prominent commentator on economic policy. “Our political leaders want to point fingers at China or some external villain, but they cannot escape the fact that this self-inflicted crisis was made in Brazil.” |
Even with the country’s legacy of economic turmoil, some historians say that Ms. Rousseff’s track record on economic growth ranks among the worst of any Brazilian president’s over the last century. | Even with the country’s legacy of economic turmoil, some historians say that Ms. Rousseff’s track record on economic growth ranks among the worst of any Brazilian president’s over the last century. |
Brazil eked out just 0.1 percent growth in 2014. The economy is expected to shrink almost 3 percent this year. For 2016, economists are forecasting no growth at all or yet another recession. | Brazil eked out just 0.1 percent growth in 2014. The economy is expected to shrink almost 3 percent this year. For 2016, economists are forecasting no growth at all or yet another recession. |
As Ms. Rousseff’s administration and the opposition bicker over austerity measures, the crisis is casting attention on striking levels of corruption, flawed decisions and a gargantuan public bureaucracy denounced as wasteful and inept. | As Ms. Rousseff’s administration and the opposition bicker over austerity measures, the crisis is casting attention on striking levels of corruption, flawed decisions and a gargantuan public bureaucracy denounced as wasteful and inept. |
Memories are still fresh here of Brazil’s recent glory days, when global leaders applauded the country’s robust economic growth, its reductions in inequality and its thriving democracy. Summing up the exuberance as Brazil boomed from exports of raw materials, President Luiz Inácio Lula da Silva triumphantly likened huge oil discoveries less than a decade ago to a “winning lottery ticket.” | Memories are still fresh here of Brazil’s recent glory days, when global leaders applauded the country’s robust economic growth, its reductions in inequality and its thriving democracy. Summing up the exuberance as Brazil boomed from exports of raw materials, President Luiz Inácio Lula da Silva triumphantly likened huge oil discoveries less than a decade ago to a “winning lottery ticket.” |
But the economic crisis is now curbing Brazil’s ambitions at home and abroad, and its leaders are struggling to mend policies that helped expose Latin America’s largest country to its worst slump in decades. | But the economic crisis is now curbing Brazil’s ambitions at home and abroad, and its leaders are struggling to mend policies that helped expose Latin America’s largest country to its worst slump in decades. |
Many economists argue that Brazil’s troubles have their origins in a series of policy shifts that Ms. Rousseff pursued once it became clear that the economy was slowing after a burst of 7.6 percent growth in 2010, the fastest rate in more than two decades. | Many economists argue that Brazil’s troubles have their origins in a series of policy shifts that Ms. Rousseff pursued once it became clear that the economy was slowing after a burst of 7.6 percent growth in 2010, the fastest rate in more than two decades. |
Hoping to prevent Brazil from cooling too much after the sizzling boom of the previous decade, Ms. Rousseff, 67, a former Marxist guerrilla who was tortured during the military dictatorship in the 1970s and took office in 2011, doubled down on bets that she could stave off a severe slowdown by harnessing a web of government-controlled banks and energy companies. | Hoping to prevent Brazil from cooling too much after the sizzling boom of the previous decade, Ms. Rousseff, 67, a former Marxist guerrilla who was tortured during the military dictatorship in the 1970s and took office in 2011, doubled down on bets that she could stave off a severe slowdown by harnessing a web of government-controlled banks and energy companies. |
Ms. Rousseff pressured the central bank to reduce interest rates, fueling a credit spree among overstretched consumers who are now struggling to repay loans. She cut taxes for certain domestic industries and imposed price controls on gasoline and electricity, creating huge losses at public energy companies. | Ms. Rousseff pressured the central bank to reduce interest rates, fueling a credit spree among overstretched consumers who are now struggling to repay loans. She cut taxes for certain domestic industries and imposed price controls on gasoline and electricity, creating huge losses at public energy companies. |
Going further, she expanded the sway of Brazil’s colossal national development bank, whose lending portfolio already dwarfed that of the World Bank. Drawing funds from the national treasury, the bank, known as the B.N.D.E.S., increased taxpayer-subsidized loans to large corporations at rates that were often significantly lower than those individuals could obtain from their banks. | Going further, she expanded the sway of Brazil’s colossal national development bank, whose lending portfolio already dwarfed that of the World Bank. Drawing funds from the national treasury, the bank, known as the B.N.D.E.S., increased taxpayer-subsidized loans to large corporations at rates that were often significantly lower than those individuals could obtain from their banks. |
Ms. Rousseff’s critics argue that she also began using funds from giant government banks to cover budget shortfalls as she and her leftist Workers’ Party headed into elections. | Ms. Rousseff’s critics argue that she also began using funds from giant government banks to cover budget shortfalls as she and her leftist Workers’ Party headed into elections. |
“They deliberately destroyed the public finances to obtain re-election,” said Antônio Delfim Netto, 87, a former finance minister and one of Brazil’s most influential economists. Taking note of the government’s inability to rein in spending as a budget deficit expands, Mr. Delfim Netto and other economists are warning that officials may simply opt to print more money, stirring ghosts in an economy once ravaged by high inflation. | “They deliberately destroyed the public finances to obtain re-election,” said Antônio Delfim Netto, 87, a former finance minister and one of Brazil’s most influential economists. Taking note of the government’s inability to rein in spending as a budget deficit expands, Mr. Delfim Netto and other economists are warning that officials may simply opt to print more money, stirring ghosts in an economy once ravaged by high inflation. |
Some critics contend that Ms. Rousseff’s missteps were not only tactical but also ideological in nature. Like her predecessor, Mr. da Silva, she and the Workers’ Party pursued a model that enhanced the government’s clout in the economy, especially in industries like oil and banking. While the strategy seemed to work for a while, early warnings about its durability went unheeded. | Some critics contend that Ms. Rousseff’s missteps were not only tactical but also ideological in nature. Like her predecessor, Mr. da Silva, she and the Workers’ Party pursued a model that enhanced the government’s clout in the economy, especially in industries like oil and banking. While the strategy seemed to work for a while, early warnings about its durability went unheeded. |
“Our leaders wanted to find the formula to increase their power and remain in office, even if this meant intensifying mediocrity in an economy,” said Reinaldo Gonçalves, an economist at the Federal University of Rio de Janeiro and a former adviser on economic matters to the Workers’ Party. | “Our leaders wanted to find the formula to increase their power and remain in office, even if this meant intensifying mediocrity in an economy,” said Reinaldo Gonçalves, an economist at the Federal University of Rio de Janeiro and a former adviser on economic matters to the Workers’ Party. |
But supporters of Ms. Rousseff contend that Brazil remains on stronger financial footing than in the past, ruling out the need to request emergency loans from the International Monetary Fund. Indeed, Brazil remains a net creditor after amassing large holdings of United States Treasury bonds; the central bank guards about $370 billion of foreign currency reserves. | But supporters of Ms. Rousseff contend that Brazil remains on stronger financial footing than in the past, ruling out the need to request emergency loans from the International Monetary Fund. Indeed, Brazil remains a net creditor after amassing large holdings of United States Treasury bonds; the central bank guards about $370 billion of foreign currency reserves. |
Moreover, programs in which the government pays monthly cash stipends to the poor, a central pillar of declining inequality since the Workers’ Party gained the presidency in 2003, do not seem to be at risk. Even Ms. Rousseff’s opponents acknowledge that such programs are a relatively cheap way to combat extreme poverty, effectively assuring their continuity. | Moreover, programs in which the government pays monthly cash stipends to the poor, a central pillar of declining inequality since the Workers’ Party gained the presidency in 2003, do not seem to be at risk. Even Ms. Rousseff’s opponents acknowledge that such programs are a relatively cheap way to combat extreme poverty, effectively assuring their continuity. |
José Guimarães, a congressman from the Workers’ Party, attacked Standard & Poor’s after the downgrade, calling it an “agency from the end of the world.” | José Guimarães, a congressman from the Workers’ Party, attacked Standard & Poor’s after the downgrade, calling it an “agency from the end of the world.” |
“This downgrade won’t diminish the government’s spirit to find solutions for balancing the Brazilian economy,” he said. | “This downgrade won’t diminish the government’s spirit to find solutions for balancing the Brazilian economy,” he said. |
Still, Ms. Rousseff is facing fierce criticism as she tries to unwind some of the policies she promoted in her first term. While energy prices are falling in much of the world, they are soaring in Brazil as the government loosens its price controls. Residential electricity rates alone have surged more than 40 percent this year as the authorities try to recoup losses at public electricity companies. | Still, Ms. Rousseff is facing fierce criticism as she tries to unwind some of the policies she promoted in her first term. While energy prices are falling in much of the world, they are soaring in Brazil as the government loosens its price controls. Residential electricity rates alone have surged more than 40 percent this year as the authorities try to recoup losses at public electricity companies. |
The economic and political crises swirling around Ms. Rousseff are now feeding one another. A ruling against Ms. Rousseff by the federal accounts court could open the way for the impeachment proceedings her opponents have been pushing for. | The economic and political crises swirling around Ms. Rousseff are now feeding one another. A ruling against Ms. Rousseff by the federal accounts court could open the way for the impeachment proceedings her opponents have been pushing for. |
The economic slowdown in China is also limiting Brazil’s maneuvering room. As Brazil grew more reliant on exporting commodities like iron ore, soybeans and oil to China, the share of manufactured goods in its exports fell to 45 percent in 2013 from 62 percent in 2000. | The economic slowdown in China is also limiting Brazil’s maneuvering room. As Brazil grew more reliant on exporting commodities like iron ore, soybeans and oil to China, the share of manufactured goods in its exports fell to 45 percent in 2013 from 62 percent in 2000. |
“We are paying the price in Brazil for the government’s mistakes over the previous decade,” said André Nassif, an economist at Fundação Getúlio Vargas, an elite Brazilian university. | “We are paying the price in Brazil for the government’s mistakes over the previous decade,” said André Nassif, an economist at Fundação Getúlio Vargas, an elite Brazilian university. |
Brazil’s unemployment rate is already surging, hitting a five-year high of 7.5 percent in July, largely because of stalled or abandoned infrastructure projects as construction giants remain embroiled in the graft scandal around the national oil company, Petrobras. | Brazil’s unemployment rate is already surging, hitting a five-year high of 7.5 percent in July, largely because of stalled or abandoned infrastructure projects as construction giants remain embroiled in the graft scandal around the national oil company, Petrobras. |
The scandal, in which contractors paid an estimated $3 billion in bribes to officials, could wipe out the equivalent of 2.5 percent from Brazil’s gross domestic product in 2015, according to GO Associados, a consulting firm in São Paulo that measured job losses at contractors and the scaling back of aggressive expansion plans at Petrobras. | The scandal, in which contractors paid an estimated $3 billion in bribes to officials, could wipe out the equivalent of 2.5 percent from Brazil’s gross domestic product in 2015, according to GO Associados, a consulting firm in São Paulo that measured job losses at contractors and the scaling back of aggressive expansion plans at Petrobras. |
Not surprisingly, the national mood is souring. Only 21 percent of Brazilians express optimism about the country’s future, the lowest in more than two decades, according to a survey by a leading polling firm, the Brazilian Institute of Public Opinion and Statistics, known as Ibope. The poll, conducted from May 14 to 18 in interviews with 2,002 people, had a margin of sampling error of plus or minus two percentage points. | Not surprisingly, the national mood is souring. Only 21 percent of Brazilians express optimism about the country’s future, the lowest in more than two decades, according to a survey by a leading polling firm, the Brazilian Institute of Public Opinion and Statistics, known as Ibope. The poll, conducted from May 14 to 18 in interviews with 2,002 people, had a margin of sampling error of plus or minus two percentage points. |
“Everything is trash today, and I have no idea if I’ll find a job when I graduate,” said Daiane Andrade, 21, a business student in Rio de Janeiro. “Unemployment and inflation are rising. Just when you think it can’t get worse, it does.” | “Everything is trash today, and I have no idea if I’ll find a job when I graduate,” said Daiane Andrade, 21, a business student in Rio de Janeiro. “Unemployment and inflation are rising. Just when you think it can’t get worse, it does.” |
Unemployment is expected to climb even higher as the authorities ponder ways to cut a federal bureaucracy that grew almost 30 percent from 2003 to 2013, to 600,000 civil servants. | Unemployment is expected to climb even higher as the authorities ponder ways to cut a federal bureaucracy that grew almost 30 percent from 2003 to 2013, to 600,000 civil servants. |
A pension crisis is also brewing, partly because of laws that allow many Brazilians to start receiving retirement benefits in their early 50s, even though life expectancy has increased and the fertility rate has fallen, limiting the number of young people to support the aging population. | A pension crisis is also brewing, partly because of laws that allow many Brazilians to start receiving retirement benefits in their early 50s, even though life expectancy has increased and the fertility rate has fallen, limiting the number of young people to support the aging population. |
“How can a person who is 52 years old be able to retire with a pension?” Luiz Fernando Figueiredo, a former central bank official, asked reporters. “These things have to be confronted. If not, the country will become another Greece.” | “How can a person who is 52 years old be able to retire with a pension?” Luiz Fernando Figueiredo, a former central bank official, asked reporters. “These things have to be confronted. If not, the country will become another Greece.” |
Parts of Brazil’s business establishment are in revolt, openly expressing disdain. Exame, a leading business magazine, devotes an entire section called “Only in Brazil” to documenting problems with the public bureaucracy. | Parts of Brazil’s business establishment are in revolt, openly expressing disdain. Exame, a leading business magazine, devotes an entire section called “Only in Brazil” to documenting problems with the public bureaucracy. |
These examples include a $120 million light-rail system in the city of Campinas that lies abandoned because of poor planning, and a measure requiring companies to obtain a special license before allowing employees to work on Sundays. | These examples include a $120 million light-rail system in the city of Campinas that lies abandoned because of poor planning, and a measure requiring companies to obtain a special license before allowing employees to work on Sundays. |
Economists warn that fixing Brazil’s problems could take years, drawing uneasy comparisons to the so-called lost decade of hyperinflation and debt crisis in the 1980s. The political battles between Ms. Rousseff and her opponents are heightening the uncertainty as many try to gauge whether she will survive the storm. | Economists warn that fixing Brazil’s problems could take years, drawing uneasy comparisons to the so-called lost decade of hyperinflation and debt crisis in the 1980s. The political battles between Ms. Rousseff and her opponents are heightening the uncertainty as many try to gauge whether she will survive the storm. |
“Brazilians kept on dancing even though the music had stopped,” said Norman Gall, director of the Fernand Braudel Institute of World Economics in São Paulo. “Now, they are scared.” | “Brazilians kept on dancing even though the music had stopped,” said Norman Gall, director of the Fernand Braudel Institute of World Economics in São Paulo. “Now, they are scared.” |