Brazil: At breaking point

By Samantha Pearson

Demonstrators rally to protest against the government of president Dilma Rousseff in Copacabana Beach in Rio de Janeiro, Brazil on 15 March, 2015. Thousands of demonstrators wearing the yellow-green national colours protested Sunday in several cities of Brazil against president Dilma Rousseff, who is facing a complex economic panorama and a political corruption scandal. AFP PHOTO / YASUYOSHI CHIBAYASUYOSHI CHIBA/AFP/Getty Images©AFP

Emilio Pastore normally spends the weekend visiting his elderly parents or taking a quiet bike ride in the countryside around São Paulo. But last Sunday the 50-year-old systems analyst printed out a banner with the slogan “no more lies” and took to the streets for the first protest of his life.

The multibillion-dollar corruption scandal engulfing state-controlled oil company Petrobras and President Dilma Rousseff’s ruling coalition was too much to bear, he says.

“Corruption has escalated from random cases to a state strategy — it now seems to be the official source of party funds, from the small-town mayor all the way up to the nation’s president,” he says. “We’ve had enough.”

Among the 1m protesters who joined him on São Paulo’s Paulista Avenue, a woman in her eighties waved a poster calling for the president to “go away”, while chanting crowds draped in Brazilian flags guzzled down beer and popcorn. This is what Brazilians, albeit in their own festive and non-confrontational way, look like when they reach breaking point. “It’s one thing for Brazilians to vote in an election; it’s another thing to take to the streets,” says Fernando Schüler, a political scientist at Insper, a Brazilian business school.

Faced with recession, decade-high inflation, poor public services, a fiscal crisis, water shortages and possible energy rationing, even the most tolerant Brazilians have found it hard to stomach allegations that up to $10bn was stolen from Petrobras to pay bribes and fund political campaigns while Ms Rousseff was chair of the company’s board.

Hundreds of thousands joined protests across Brasília, the country’s capital, and 25 other states on Sunday, making the demonstrations the biggest since those that preceded the impeachment of President Fernando Collor de Mello over corruption in 1992. “We are seeing a shift in the nature of political risk surrounding Brazil,” says Rafael Cortez, a political scientist at Tendências, a consultancy. Ms Rousseff now faces becoming a “lame-duck president” only three months into her second term, he says.

With calls for Ms Rousseff’s own impeachment and a Datafolha poll this week ranking the leftwing leader as the most unpopular president since Mr Collor de Mello, it may appear that history is repeating itself. However, while Ms Rousseff’s approval rating will probably drop below the current 13 per cent as the economy further deteriorates, the world’s second-largest emerging market has come too far to return to the dark days of its past, says João Augusto de Castro Neves of Eurasia Group.

Austerity measures introduced by Joaquim Levy, Brazil’s new market-friendly finance minister, are expected to put the economy — forecast to contract 0.8 per cent this year — on a path back to growth by 2016. Meanwhile, the emergence of the Petrobras scandal in March last year is itself credit to the growing independence of Brazil’s judiciary and public prosecution service.

“There has been undeniable progress . . . despite the feeling that we are back to square one,” says Mr Castro Neves.

Towering above Rio de Janeiro’s historic centre, the concrete Jenga-style building that houses Petrobras’s headquarters has gained an almost mythical status over the past year. After all, what happens within its grimy slatted walls over the next two months could decide Brazil’s immediate future.

If Petrobras cannot calculate the company’s losses from corruption and convince its auditors PwC to sign off its annual financial statements by the end of May, the world’s most indebted oil major faces technical default. After the company missed third-quarter reporting deadlines, Moody’s says it “does not yet see any assurance that audited statements will be available by any particular date”. Missing the May deadline would break the covenants on its $137bn of debt, prompting a possible bailout and further fiscal deterioration, says Nymia Cortes de Almeida at the rating agency, which downgraded the company to junk in February.

For much of the past decade, some former executives at the New York and São Paulo-listed company allegedly colluded with the country’s top politicians and construction firms to cream up to 3 per cent off Petrobras contracts. This cash, often siphoned off through Swiss bank accounts, was used to pay bribes and finance political campaigns, claim prosecutors. Foreign contractors including Rolls-Royce have also been accused of making illicit payments.

While prosecutors had identified $800m of kickbacks by January, the final amount stolen is likely to be about $10bn given the alleged 3 per cent figure, the time periods involved and the size of Petrobras, which accounts for 10 per cent of all investment in Brazil, says André Gordon of the Amec shareholder association and founder of asset managers GTI.

It is a case that has both appalled and fascinated Brazilians, much like the improbable plots of the country’s soap operas. Many have rejoiced over the authorities’ battle against impunity, devouring media reports on the construction bosses who remain detained in police cells. But fascination has often given way to despair, as it did this week over allegations that Mr Collor de Mello also received cash in the scheme. He has denied the claims.

“There is a sensation that the country is being systematically robbed by the political apparatus,” says Mr Schüler, adding that the investigation comes only a year after politicians were jailed over the Mensalão vote-buying scandal. While that scheme was allegedly operated between 2003 and 2005 by advisers to the then-president Luiz Inácio Lula da Silva, Ms Rousseff’s mentor, he denied any knowledge of it and never faced formal charges.

While the president has denied any involvement in the scheme and the PT says all the donations were legal, opposition parties have called for Ms Rousseff to be investigated, as critics claim she was either complicit or incompetent.

But impeaching a president is not easy, says Diego Werneck, a law professor at FGV, an academic institution. “Losing the confidence of the people is not enough,” he says. There would have to be evidence she committed a crime, preferably one during her current mandate that resulted in her personal enrichment, he says.

Whatever her faults, the president has never shown much interest in the trappings of wealth. On a trip to Uruguay this month, Ms Rousseff was pictured in a local supermarket buying milk and groceries after reportedly cancelling a dinner date with ministers.

As a Marxist guerrilla in the 1960s, Ms Rousseff probably never imagined that she would depend on a Chicago-trained former banker for survival. During last October’s election, her party demonised the banks. However, her finance minister Mr Levy is now considered the best hope for Brazil’s recovery and that of Ms Rousseff’s own career.

After winning re-election by one of the narrowest margins in Brazilian history, Ms Rousseff made a surprise policy U-turn by hiring Mr Levy and proposing a series of benefit cuts and tax hikes. While Brazil recorded its first primary budget deficit in more than a decade in 2014, Mr Levy has promised a surplus this year of 1.2 per cent of gross domestic product in a bid to restore credibility and attract investment.

Such efforts are long overdue. Like other emerging markets, Brazil has suffered from the end of the commodities supercycle, but years of overspending and state interventionism are also to blame for signs of stagflation. The Petrobras scandal, which has already led to job losses and paralysed the industry, will probably hurt the economy further.

Persuading voters of the need to cut spending at a time when Brazil’s public services are suffering will be a hard sell, analysts say. Horror stories abound about the country’s health services. This week dentists in Brasília posted a video that went viral of them removing 15 maggots from a girl’s gums.

Eurasia’s Mr Castro Neves says the fiscal agenda is still viable, given Ms Rousseff’s recent conciliatory efforts to bring ministers from other parties into her inner circle. The bigger challenge will be political reform — finding a way to remove the structural incentives for corruption and restore Brazilians’ faith in their leaders, analysts say.

During a heated session in Congress on Wednesday, education minister Cid Gomes branded the PT’s allies a bunch of opportunists, yelling out he would rather be considered impolite than an “extortionist”. It was a rare moment of frankness that struck a chord with the disillusioned Brazilians who took to the streets on Sunday.

But in a sign of how far Brazil still has to go to regain their trust, Mr Gomes was promptly fired.

If the amounts of money involved in the Petrobras scandal are staggering, it is at least partly because there was so much money sloshing through Brazil during the commodity boom, analysts say. In the year since prosecutors arrested Paulo Roberto Costa, their first Petrobras executive-turned-informant, 103 people have been indicted and 33 members of Ms Rousseff’s Workers’ party (PT) and coalition allies are under investigation by the Supreme Court.