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Brazil economy plunging with no relief in sight

Published:Thursday | October 1, 2015 | 10:25 AMAP
Dilma Rousseff, the embattled president of Brazil.

A currency hitting historic lows. Unemployment at a five-year peak. Consumer spending in the dumps, and a grinding political crisis that's frozen leaders' ability to push through Congress measures to jump-start a moribund economy.

The news keeps getting worse for the once-ballyhooed Brazilian economy, compounding the delicate political situation for President Dilma Rousseff, who, polls show, is the nation's most unpopular president since the 1985 return to democracy.

Rousseff is trying to fight off widespread calls for her impeachment or resignation, which gives her scant political capital to force austerity measures through Congress to halt across-the-board economic haemorrhaging.

Brazil's woes were stoked by the recent years' collapse in commodity prices, due largely to lessening demand from China's slowing economy. Economists also blame failure to reform taxes and labour markets over the past decade of good times, and the collapse of an economic model that relied on domestic consumption.

"It wasn't just that Brazil consumed all its commodity income it took in from 2007 to 2011, it's that it consumed all of it plus more by borrowing overseas," said Neil Shearing, the New York-based chief emerging markets economist for Capital Economics.

Not preparing itself for lean years while its economy expanded created an "ugly toxic mix".

"Add on top of the economic train wreck a political train wreck, and the fact that the government can't push through Congress the fiscal belt-tightening measures it needs to create growth," Shearing said.

That's largely why Brazil lost its investment-grade status when Standard & Poor's downgraded the nation's sovereign debt this month. Stockholders are suffering too: Companies listed on Brazil's main Bovespa stock market have lost US$1 trillion in value since early 2011.

Politically, Rousseff is increasingly isolated amid the worst graft case the nation has yet seen. Prosecutors say top construction and engineering firms paid over US$2 billion in bribes to some politicians and executives of state-run oil company Petrobras in exchange for inflated contracts during a period when Rousseff herself was the company's chairwoman. While she faces no formal accusations of wrongdoing, the leader of the Lower House already faces corruption charges and the head of the Senate is under investigation, adding to legislative gridlock.

The scandal has paralysed Petrobras, long the pride of Brazilian enterprise and the company counted on to catapult the nation to developed-world status by tapping into vast offshore oil reserves discovered in recent years, undersea riches it's been unable to make good on.

It's also hit the construction sector at the epicentre of the scandal. Construction and industry account for the vast majority of the 986,000 Brazilians who lost their jobs in the last 12 months, according to a Friday report from the labour ministry.

The economy's problems are varied and acute, with few short- or midterm remedies.

The Brazilian currency, the real, has plummeted about 35 per cent against the dollar this year, hitting an all-time low in recent days of over 4-to-1. A strong dollar hikes inflation in Brazil and cripples many of the nation's top firms that hold dollar-denominated debt - principally Petrobras, the country's biggest company.

The currency plunge has also shocked Brazilian consumers, who for years enjoyed a strong real that made foreign goods seem cheaper.

Now, Brazilians are curtailing trips to the US, where legions went on shopping sprees in recent years. They're also confronting rapidly rising prices on everything from cosmetics to medicine to that most basic of products on virtually all Brazilian tables at breakfast what locals call 'French' bread: crusty little loaves that are purchased daily and are now more expensive as Brazil imports more than 60 per cent of the wheat it consumes.

"This simple staple of the Brazilian diet, literally 'our daily bread,' is beginning to be too expensive for some of us," said Silvia Vasconcelos, a housewife gesturing toward the bakery section inside a grocery store in Rio's Ipanema neighbourhood, where the price of bread has risen by about 30 per cent in the last five months to US$3.75 per kilogram (US$1.70 a pound). "Who knows where the price will go, but for now I have to buy less than I'd like."

With inflation running at 9.5 per cent - well above the government's ceiling target of 6.5 per cent - the central bank has less space to cut benchmark interest rates, said Caio Megale, an economist with Ita? Unibanco, Brazil's largest bank.

That means borrowing costs will remain high for businesses and individuals, making it difficult to spark domestic growth.

Exporters in Brazil should be the winners because a weaker local currency makes their products cheaper and thus more competitive abroad.

But JosÈ Castro, head of Brazil's Association of Foreign Trade, said the strong dollar isn't yet of much help. Things are changing so fast people are afraid to sign contracts because they don't know where the currency is heading.

"Predictability is one of the main problems," he said. "It's too shaky for anyone to do business."