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Brazil is at a political and economic turning point

24 Aug 2018 16:17|Marcin Lipka

"Since the beginning of the year, the Brazilian real has lost almost 20% of its value to the American dollar. This is not only a result of the lack of reforms since the last crisis or strikes a few months ago. Brazil will have to face a very serious political crisis, the most obvious example of which is the imprisonment of the most popular presidential candidate," writes Marcin Lipka, Conotoxia Senior Analyst.

The past few years have been very difficult for the Brazilian economy. The end of the boom on industrial metals and agricultural raw materials, of which this Latin American country was a beneficiary, caused a two-year recession in Brazil (2014-2015). Excessive social spending and lack of reforms during the fat years contributed to the explosion in debt, which is now reaching 84% GDP, compared to 58% in 2014.

Difficulties in dealing with the crisis have resulted in Brazil losing its investment rating and ceasing to be a foreign capital favourite. The political situation is also a serious problem for the country. In mid-2016, one and a half years after being sworn in for a second term, the former President, Dilma Rousseff, was dismissed by Congress in an impeachment procedure related to a corruption scandal.

Her deputy and current president, Michel Temer, very quickly began to lose public support (currently fluctuating at the 5% level), did not carry out any key reforms (e.g. too generous a pension system), and in addition, at the end of May, the state practically stopped during a nationwide strike of truck drivers opposing the rise in fuel prices. Unfortunately, this is not the end of the Brazilian problem. In a month and a half they will have to face one of the strangest elections in history.

Lula - a candidate from prison

For some time, one could have thought that at least some of Brazil's problems, especially those related to corruption and the lack of reform, could be solved by the October elections. Unfortunately, in recent months, these have been the ones that have generated the problems, above all.

The government, before the elections, gave in to the protesting drivers and lowered fuel prices, although for years subsidies for road transport had been a burden of fiscal expenditure and distorted competition in the market. In addition, Luiz Inacio Lula da Silva, often simply called Lula, was sent behind bars due to allegations of corruption. Between 2003 and 2010, the President of Brazil, identified (in many cases wrongly) by his countrymen as economically successful, decided to run for the office. Although the Electoral Tribunal has registered his candidacy, he will not be able to actually participate in the race to the presidential seat. The decision to ban the participation in the elections is likely to come in the next two to three weeks.

Harmful games of the Workers' Party

Information on the imprisonment of the presidential candidate is not yet Brazil's most serious problem. More importantly, according to the survey from August 20th (Datafolha), Lula enjoys the support of 39% of the participants, while there is nearly half the amount of voters for the second candidate in the running, Jair Messias Bolsonaro - 20.5%.

The Workers' Party (PT), from which comes Lula and Rousseff, who was dismissed two years ago, obviously has a different candidate, if ultimately Lula cannot stand. However, support for his candidacy is so low that he practically ceases to count and Lula's votes are spread over other, often ideologically contradictory, people.

It is possible that PT made a huge mistake in promoting Lula and hoping to attract votes. When Lula is rejected by the Court, almost 40% of voters will be left without a candidate just before the first round of elections in October 7th.

In addition, due to the turmoil surrounding Lula, the future President will have serious problems pursuing the necessary reforms, as the society that supports the former leader in prison will not be willing to make unavoidable sacrifices. It will therefore be an invitation to another economic crisis.

Political crisis is an economic crisis

Similar conclusions are starting to be drawn by investors. Political uncertainty may not end after the elections. This is contributing to the fall in the value of the real, which has lost almost 20% of its value in relation to the dollar this year and is at the lowest level in history, achieved during the 2014-2015 crisis. In addition, the real is the fourth weakest currency in the world, out of 146 countries, this year, ranking only at the level of the Argentinian peso, the Turkish lira and the Angolan quanza.

24 Aug 2018 16:17|Marcin Lipka

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