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Rousseff Begins Second Term as Brazil Economic Malaise Hits Home

Thursday, 01 Jan 2015 07:55 AM

Dilma Rousseff will be sworn in today for her second term as Brazil’s president as a corruption scandal involving the country’s biggest company, above-target inflation and the slowest economic expansion in five years undermine her support.

Since Rousseff took over from her mentor Luiz Inacio Lula da Silva four years ago, the budget deficit has more than doubled to 5.8 percent of gross domestic product and economic growth has come to a standstill from 7.5 percent growth in 2010. Inflation has remained above the center of the target range throughout her first term.

Rousseff, who won an Oct. 26 runoff election by the narrowest margin of any president since at least 1945, has appointed a new economic team and announced spending cuts. The central bank increased the key lending rate twice since the election to contain consumer price increases. While such measures are a first step to prevent a credit rating downgrade, the question is whether Rousseff will have the political support to hold the course, said Rafael Cortez, political analyst at Tendencias, a Sao Paulo-based consulting firm.

“The economic malaise will spread to consumers and the corruption scandal will impose a negative legislative agenda,” Cortez said in a phone interview. “In a best-case scenario, she’ll manage to recover some investor credibility and pave the wave for moderate growth; the worst case is that we’ll have a lame duck president in a year or two.”

Rousseff is scheduled to be sworn in today and address Congress in Brasilia this afternoon.

Budget Surplus

Designated Finance Minister Joaquim Levy pledges to pursue a budget surplus before interest payments of 1.2 percent of gross domestic product this year and at least 2 percent of GDP in 2016 and 2017, after Brazil’s credit rating in 2014 suffered a downgrade for the first time in more than a decade. The primary budget balance turned to a deficit of 0.18 percent of GDP in the 12 months through November, the first such annual shortfall on record.

On Dec. 29 the government announced cuts to pension and unemployment benefits that will save an estimated 18 billion reais ($6.8 billion). Authorities also have increased the long- term lending rate for loans granted by the state development bank BNDES to 5.5 percent from 5 percent.

Social welfare spending, which helped assure her support among the lower income voters, particularly in the poorer northeast, would not suffer spending cuts, Rousseff said last week.

Above Junk

Slower growth and a widening budget deficit prompted Moody’s Investors Service in September to cut Brazil’s credit outlook to negative. Moody’s rates Brazil Baa2, two levels above junk. Its move came six months after Standard & Poor’s reduced Brazil’s rating for the first time in more than a decade to the lowest level of investment grade.

With annual inflation having exceeded the 6.5 percent ceiling of the target range in the four months through November, more than two-thirds of Brazilians disapprove of Rousseff’s policies to contain consumer prices, a December opinion survey by Ibope polling firm showed. It interviewed 2,002 people and had a margin of error of plus or minus two percentage points.

A scandal over alleged kickbacks on contracts with state- owned oil company Petroleo Brasileiro SA also threatens to erode Rousseff’s support and create legislative gridlock, Cortez said. Prosecutor General Rodrigo Janot said Dec. 17 that he will request in February an investigation of almost 30 members of Congress, newspaper O Globo reported.

Corruption Network

Rousseff was chairman of the company’s board from 2003 to 2010, and ex-Petrobras executive Pedro Barusco testified that the corruption network existed before and throughout her tenure. Rousseff said Sept. 8 that while she was chairman she was unaware of corruption at Petrobras. The chairman is not involved in the day-to-day running of the company.

More than two in three Brazilians on average say Rousseff has some responsibility for the corruption scandal at Petrobras, according to a Datafolha poll of 2,896 people on Dec. 2 and 3, which had a margin of error of plus or minus two percentage points.

The presidential press office didn’t respond to an e-mailed request for comment on the Datafolha poll and the impact of the scandal on her support in Congress.

 

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Dilma Rousseff will be sworn in today for her second term as Brazil's president as a corruption scandal involving the country's biggest company, above-target inflation and the slowest economic expansion in five years undermine her support.Since Rousseff took over from her...
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