Brazil's economy hits the skids

[SAO PAULO] Bad news piled up Friday for Brazil's economy, with the real plunging to its lowest level against the dollar in 12 years and analysts warning the home of samba will need years to recover its economic rhythm.

For President Dilma Rousseff, weakened by government approval ratings of just 7.7 per cent, things appear to be falling apart.

Friday's tumble of the national currency to 3.34 to the dollar followed Thursday's news of unemployment rising in June for a sixth month, while annual inflation has risen to almost nine percent.

Analysts say Brazil's once booming economy suffers deep underlying illnesses, notably the massive corruption scandal unfolding at national oil company Petrobras and rippling across other top companies and into political circles.

On Friday, prosecutors announced formal Petrobras-related charges against Marcelo Odebrecht, chairman of Brazil's biggest construction firm, Odebrecht. The once powerful executive is in detention.

The latest sign of macro-economic problems appeared on Wednesday when the government announced a radical cut to its fiscal savings goal and said it would increase austerity measures.

Finance Minister Joaquim Levy said the lowering of the surplus goal from 1.1 percent of GDP to just 0.15 per cent reflected the worsening performance in the world's seventh largest economy.

With Brazil on the brink of recession, "there has been an effect on tax receipts," he said.

However, the government's commitment to austerity measures was unshaken.

Cuts of 8.6 billion reais (S$3.65 billion) were announced, raising this year's cuts to US$24 billion, the ministry of planning and budget said.

"The revision is largely to do with the slowdown of the economy, which turns out to be deeper than thought," said Ignacio Crespo, an analyst at Guide Investimentos in the financial capital Sao Paulo.

"It's hard to know how far the recession will go, but for sure it will be tougher. Contrary to what we hoped for a few months ago, the economy will be going down in 2016," he said.

Another analyst, Andre Ferreira, from Futura, said he didn't expect growth to return before 2018.

If so, that would add up to a seven-year stretch of zero or negative growth in a country that not so long ago had been hoping to ride the commodities boom to top rank economic status.

In 2014, GDP grew just 0.1 per cent and this year the government forecasts a 1.49 per cent contraction, while the market expects even worse.

The economic hangover dovetails with a worsening political situation, especially for Rousseff who only began her second term, following a divisive re-election, in January.

"There is a drastic deterioration in expectations and this is deepening the political crisis," Andre Cesar, a political analyst in the capital Brasilia, said. "The tendency is for worse." The Petrobras scandal, he said, has presented the Rousseff government with a "moral crisis" as well as direct economic fallout, given the importance of the oil giant in the nation's political and economic landscape.

Spreading from within Petrobras' ranks, the probe has reached Rousseff's Workers' Party and also opposition figures.

Ms Rousseff, chairwoman of Petrobras for seven years before she became president, has not been directly implicated in the scandal but there are mounting calls for her resignation or impeachment.

Smelling blood, Workers' Party opponents in Congress are blocking Ms Rousseff's legislative agenda, while the speaker of the lower house and her nominal ally, Eduardo Cunha, has demonstratively broken ranks and gone into opposition.

As a result, Ms Rousseff is hardly in a position to reform Brazil's public spending.

"Political conditions for such an adjustment, however, simply don't exist," Eurasia Group consultants said.

"With popular discontent and unemployment expected to rise in the coming months, the government's (already low) capacity to meaningfully cut expenditures is expected to decline even more."

AFP