The Crises in Brazil

The current political battles both within and between the governing Workers' Party coalition and the opposition parties centre on the Petrobras corruption charges (see FRFI Web October 2015). Payments extorted by Petrobras managers in return for awarding private contracts, were passed to the governing parties. Such scandals erupt regularly as the Brazilian ruling classes finance their own positions as imperialism drains Brazil’s resources.

The deepening global economic crisis has exposed both the country’s greater dependence on raw material and agricultural sector exports, and the tightening noose of international finance on its cash flows. Brazil is facing its worst recession since at least the 1930s. Industrial production plunged 12.4% in 2015. The economy shrank nearly 4% and it will contract another 3% in 2016.

The Brazilian currency, the Real, collapsed in value by 32% last year. Over the three years from 2012, it fell from $0.60 to $0.25 or from £0.40 to £0.17 per Real. Thus the wealthy states, which now buy smaller quantities of material from Brazil as they face their economic crisis, are paying Brazil knock down prices. The global exchange rate mechanisms, driven by western banks, impose their will on Brazil to ensure that the costs of the global crisis are passed as far as possible on to the workers in Brazil and in all the other non-imperialist states. In 2015, the value of Brazilian exports fell 14%, to $191bn. The oil price collapse and further reductions in Chinese purchases will worsen the situation.  

Conversely, import prices faced by Brazilians rocketed and imports collapsed by 39% in 2015. The working class bought much less, and the middle classes, despite expanded credit, held back from spending. This sharp squeeze meant that while the Brazilian bourgeoisie accumulated a $6.24bn trade surplus in December 2015, up from only a $0.29bn surplus a year earlier, and the highest on record, they immediately had to pay it back to the imperialist states in interest and dividend payments, financial service charges, insurance costs, leasing costs, license fees, ‘intellectual property services’, and so on, so that the overall current account remained in deficit. On top of this, capital continued its flight from Brazil, a continuous flight since 2010, despite new Finance Minister Barbosa’s playing down the issue at Davos this month. Like all the ‘developing’ countries, Brazil is in fact ‘developing’ the imperialist states.

In late 2015, Goldman Sachs closed its BRIC fund after assets dwindled to $100m from a peak of more than $800m at the end of 2010. Financial funds managed by Carmignac, Fidelity and Baillie Gifford have exposure of 3% or less to Brazil and Russia. Heavy selling of ‘emerging market’ stocks and bonds by imperialist investors since the mid-2015 threatens a ‘credit crunch’, and at this rate debt tribute to ‘the west’ will become unpayable. Brazilian companies will find it very hard to repay their external corporate debts as the Real tumbles. All they can do is sell off more of their assets to the west. Petrobras aims at selling $14.4bn worth.

The Head of the Mexican Central Bank, Carstens, recently said ‘Emerging markets need to be ready for a potentially severe shock, … The adjustment could be violent and policymakers need to be ready for it.’ (Financial Times 17 January 2016).

The draining of Brazil’s economy of foreign currency by the imperialist states, which they send there only to raid its basic resources, is the real issue for Brazil, not so much national debt servicing which at 7% of GDP, is mostly in local currency. These interest payments are recycled to the Brazilian wealthy and their institutions inside the country. Default is unlikely, but the financial classes demand the defeat of inflation to prevent the erosion of this source of their wealth, equivalent to 70% of GDP, and rising fast. They must prevent ‘debt deflation’. So with inflation now at 11%, Brazil’s central bank interest rate is 14.25%, higher than during the 2009 world trade crisis, and expected to rise again. The banks’ cash reserve ratio is set at 45%. This is the framework for a new attack on the workers' incomes through increased taxation and further state spending cuts.

However, about 90% of public spending is protected from cuts, partly by the 1988 constitution, so that the Workers’ Party present position is untenable. It either has to press for a genuinely socialist programme, which will require extraordinary efforts among, and by, the masses, or watch the national and international bourgeoisie forcibly extend mass misery throughout the working and lower middle classes.

In the last year the official rate of unemployment in Brazil (those registered as looking for jobs) has doubled from 4.5% to 9%, some 9 million workers. This is a gross under-statement of the real rate which ignores the millions of partially unemployed and under-employed workers who struggle to feed and clothe themselves. Tragically, many young students dream of fleeing Brazil in order to be exploited by capital in Europe or North America. There is a flourishing trade in false Portuguese passports.

Worse to come

In the first week of January, Workers' Party President Rui Falcão attacked the use of high interest rates and called for subsidies to reignite the economy. Falcão is anxious to recover the confidence of the people. Anxious investors, however, resist any interference in the ‘free market’, such as President Rouseff’s previous capping of energy and fuel prices, or state spending from profits that impedes its private use. The bourgeoisie understands that previous state budgets which helped lift millions out of abject poverty restrict their financial freedom of manoeuvre. In fact, state spending that boosts consumption, the strategy of conciliation that Presidents Lula and then Dilma adopted, cannot ultimately protect the masses from unchained market forces.

Last year, to reduce the state budget deficit of more than 9% of GDP, Dilma Rousseff hired fiscal hawk Joaquim Levy as finance minister. He trimmed discretionary spending by a record 70bn Reals ($18bn) in 2015 and tightened eligibility for unemployment insurance. However, Congress and the Workers' Party blocked his attempts to cut expenses further and raise taxes. As a result Standard and Poor’s, and then Fitch's, downgraded Brazil’s debt to junk status. Levy resigned and was immediately appointed new chief financial officer of the World Bank.

Rouseff, subject to impeachment proceedings by the opposition for financial corruption, retreated to the shelter of the left of the Workers Party. The impeachment process is set to resume after Congress ends its recess in February, and after the budget-depleted carnival season ends. Impeachment would take months to pass through Congress. In any case, Dilma Rousseff has effectively opened the agenda set out by the opposition.

The Workers' Party faced tremendous challenges between 2000 and 2008, filling its posts with new members or sympathisers from the middle class who had not been involved in the struggle to build the Party previously. This facilitated the Party’s turn to a pragmatic policy and a dilution of any socialist ideas. In 2002, it formed an alliance with businessman José Alencar to win the presidential election, and with several conservative parties to form a government. With 28 parties in Congress, compromise and corruption penetrated the Party.

Rio de Janeiro is to host South America’s first Olympic Games in August. By then the economic situation will have deteriorated further. Minister Barbosa’s plans to extend credit via public banks and funds to small and medium-sized companies in sectors such as civil engineering and infrastructure, will meet obstruction from the financial class as being too lax. There is a deep sense of anxiety amongst the Brazilian ruling classes as they sit with one eye on the pot and the other on the chimney, on the simmering Brazilian working class and on the demands of imperialism.

Alvaro Michaels


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