This year just got a whole lot tougher for Brazil.
Brazil’s job market is getting worse, as Friday’s data suggests. And in the nation’s capital, the biggest political ally to the ruling Workers Party (PT) is staging a mini coup de etat. It’s unlikely to have a positive impact on reforms and the mini-austerity package being promoted by Finance Minister Joaquim Levy, the market’s man in Brasilia.
The old Democratic Movement Party, known by its acronym PMDB is far from being clean as a whistle. So side-swiping PT isn’t like they’re lobbing off the snake’s head. These guys are the scales and the tail.
In fact, their two biggest politicians were cited for allegedly receiving kickbacks or at least allowing for it in a slick oil-money-for-Workers-Party-friends campaign that crushed Petrobras shareholders and turned Dilma Rousseff’s second term into a lame duck presidency. For what it’s worth, Levy is running the economy, and the two heavyweights of PMDB are running both houses of congress. Dilma is in the cross hairs. The population is not impressed. Her approval rating is round 10%. The media are at her constantly. And her allies, as corrupt as they may be, want to part of her. All of this is occurring at a time when the economy hit bottom, fell through the floor, and now is in a black hole of nothingness. The only thing going on in Brazil right now is job erosion and political crisis. And this, less than a year away from the Summer Olympic Games in Rio de Janeiro. There is little to be happy about, other than the fact that the bad guys are getting their feet held to the fire for once.
The locals have little to celebrate in all this.
Formal job market destruction shows no signs of reversing course.
In June, Brazil lost 111,199 jobs compared to the creation of 25,363 positions in June 2014, according to data from CAGED, Brazil’s employment register at the Ministry of Labor. Year-to-date, 389,533 jobs were eliminated versus the creation of 493,118 jobs in the same period of 2014. In seasonally adjusted terms, today’s print is close to the historical low of 161,275 cuts in May.
The commerce sector shed 191,000 jobs last month, with the processing industry shutting down around 65,000 positions in just four weeks. The Petrobras scandal has the oil firm’s privately held construction partners in a tailspin. More layoffs occurred last month. Over 45,000 civil engineers and low skilled construction laborers are out of work. At least two construction partners of Petrobras have filed for bankruptcy protection. Construction firms were caught taking bribes and colluding with Petrobras management to massively overprice at least two oil refineries. Petrobras stock hit $5 a share in March and has since struggled to return to double digits.
Brazil’s new “Coup Man”. The president of the Chamber of Deputies, Eduardo Cunha, from the Brazilian Democratic Movement Party (PMDB), said Friday that he has kicked President Dilma Rousseff to the curb. Brazil investors…we have a problem. (Photo by YASUYOSHI CHIBA/AFP/Getty Images)
Friday’s jobs report provides another piece of information on the ongoing deterioration of the Brazilian economy. Not only is unemployment increasing, but the wage dynamics suggest that household disposable income will decrease this year, leading to a contraction of consumer spending in GDP.
In terms of monetary policy, inflation of nearly 9% is forcing the central bank to keep interest rates high or risk higher prices. Brazil is now damned if it does and damned if it doesn’t on the inflation front. To bring inflation to target of around 5%, interest rates need to stay high. But high interest rates mean higher capital costs and companies with shrinking profit margins don’t want to use their dwindling financial resources to pay loan interest. The benchmark rate in Brazil is 13.75%.
High inflation is another data point weighing on the market and will keep investors at bay for the most part. There is a chance that the worsening job market will put the breaks on rate hikes after this month. The market is forecasting at least a 25 basis point hike in July, with rates ending the year at 14.5%, according to some economists like Andre Perfeito of Gradual Investimentos in Sao Paulo.
A Soft Coup in Brasilia
Brazil’s political crisis deepened on Friday when Eduardo Cunha, the head of Brazil’s lower house and one of the PMDB politicians that made the famous public prosecutor Rodrigo Janot’s List of politicians believed to have been part of the Petrobras scandal in the capital, said his party was breaking ranks with Dilma. PMDB is the largest political party in Brazil in terms of congressional seats.
In a somewhat laughable commentary today, Cunha accused Dilma of trying to get prosecutors to throw him under the bus in the ongoing Petrobras investigation. (Because if he did indeed do something wrong, the president of the country should ignore it because they’re coalition partners, right? But that’s my opinion. Onward…)
On Thursday, the federal judge leading the investigation broadcast testimony from a defendant who turned state’s evidence alleging that Cunha took bribes, something that has been suspected since Janot’s list was published in the first quarter. PMBD’s split from PT might be temporary. But it comes at a time when Dilma is unable to get anything done in congress. Recently, lawmakers rejected spending cuts proposed by Levy as well as tax hikes.
Cunha’s trusty sidekick in the senate, Renan Calheiros, was also cited on Janot’s list. The list was littered with PT allies, mainly the Progressive Party and PMDBs two top officials. Janot believes they got their hands dirty with Petrobras. Both Cunha and Calheiros control congress. They may continue to reject Levy’s austerity measures, which analysts say will impact Brazil’s investment grade credit rating. As it is, it is hanging like a loose tooth over speculative grade status.
Worth noting, unlike Greece, Brazil’s austerity via pending tax hikes were largely part of a reversal of tax cuts that were made under former FinMin Guido Mantega. Brazil is one of the most over-taxed societies around. Raising taxes in a dour economy does not bode well for growth. But at the same time, Mantega’s tax breaks failed to keep Brazil above water. The economy has been in decline now for the past two years, given the end of the commodity super cycle. Brazil is the world’s largest exporter of important commodities like iron ore and sugar.
A silhouette shot of Brazil’s President Dilma Rousseff taken at the Mercosul Summit in Brasilia on Friday, July 17, 2015. Less than a quarter of the population think she is doing a good job as the country’s worst-ever political crisis continues to unfold. It will hurt investors longer than expected. (Photo by Joedson Alves/AP)
It seems clear that biggest names in PMDB are not in Cunha’s corner. New York Times reporter Simon Romero wrote today that Cunha is the main voice of opposition within PMDB, saying he would push the party to “break completely with the government.” He may end up being a lone gunmen. This is the best case scenario and will likely be the base case scenario for now.
In the worst case, PMDB splits with some supporting Cunha. That leaves PT with fractured left wing allies, most of which are not fans of FinMin Levy.
Moreover, PMDB is not a natural ally to the Social Democrats (PSDB), PTs only serious opposition in the government. It is hard to envision PMDB and PSDB joining forces for long.
More likely is the fact that Cunha’s move today is one of an injured animal being backed into a corner.
Like Cunha, dozens of politicians have been implicated in the Petrobras scandal. Executives from large conglomerates have either spent time in prison or, like Marcelo Odebrecht, owner of the construction giant that bears his name, is still locked up. This is unheard of in the annals of Brazilian history.
But while the Federal Police unravel what may be the worst political scandal ever, Dilma is weaker for it. And if PMDB truly splits, as Cunha is demanding, then Levy will have a harder time reforming the economy. This is the worst case scenario. In short, it’s band-aid time in Brazil as this unfolds. The next two years may be a wash if the political drama keeps up. So much for 2016 being better than this one.