Social unrest increases in Brazil as the political-economic scenario deteriorates

Facing a series of political-economic crises, President Dilma Rousseff witnesses growing social discontent in Brazil as unemployment rates are raising along with inflation rates and the tax burden. The strongest signal of growing unrest against her government came during February, when a truck drivers’ strike blocked main roads and delayed the delivery of essential consumption goods, as well as exports, in particular commodities. Due to the scarcity of staples, prices tend to increase more than expected.

Market projections suggest that inflation this year will surpass in at least 1 percent point the 6.5 percent maximum target;

The official unemployment rate has increased from 4.3 percent last December to 5.3 in January. The scenario tends to worsen as companies involved in the Petrobras’ bribery scandal may have to fire thousands of workers;

The government has tightened the fiscal policy, having suspended tax breaks and establishing new rules to avoid evasion of income tax.

What next

Mass manifestations against the government are scheduled to take place on 15 March. Although no major oppositional party or organization is coordinating the demonstrations, they tend to take a relevant number of people to the streets.

Rousseff faces two major problems less than 100 days after the inauguration of her second term: the deteriorating economic scenario in spite of measures to regain the market’s confidence after a first term pervaded by a loose fiscal policy, and the political turmoil triggered by the evidence of kickbacks for office holders in Petrobras’ contracts. The period which for most heads of government consists of a honeymoon with the electorate has therefore become a nightmare worse than anyone could expect. Yet, the president still has conditions to recover—at least in the long term—the confidence of the electorate.

On the political front, she tends to gain leverage as 45 members of the parliament from the Chamber of Deputies and the Senate, including the speakers of each house, are listed as suspects of receiving bribes from Petrobras’ subcontractors. Public opinion’s perception of widespread corruption weakens any eventual attempt of impeaching the president, as in such a context the Legislative Power lacks legitimacy even vis-à-vis a weakened Executive. Although Rousseff herself was between 2005 and 2010 president of Petrobras’ Administration Council, she will not face any criminal charges due to the lack of evidence, reports the Office of the Attorney General, responsible for prosecuting and demanding inquiries involving elected authorities at the federal level.

However, the president is unlikely to face a truce on the economic front in the as the adjustments that Brazilian market needs before gaining conditions of recovering the strength it showed in the last decade. This is the case not only because the fiscal

straitjacket the liberal-minded, Chicago-trained Ministry of Finance Joaquim Levy has been implementing since January will have positive effects only in the medium-term, certainly after the next year. Also the short term costs of rising taxes, such as expansion of unemployment rates, have been increasing due to parallel developments in the political and social spheres.

Soaring prices

Truck drivers blocked some of the busiest Brazilian roads during the last two weeks of February. They complain that, with Rousseff’s government institution of a tax on fuel (CIDE, which used to exist during most of the 2000s), they are not making any profit. Blockades prevented essential goods to arrive to consumers, particularly those who live hinterland towns, hence triggering price hikes, an additional factor to contribute to increase inflation beyond current market projections.

In São Paulo, vegetable prices are reported to have increased about 30 percent only because the strike;

The last Brazilian Central Bank (BCB) Focus bulletin reported a growing pessimism among market actors, as the average projection for inflation rates is 7.47 percent;

Energy prices increased by 23.4 percent on average this month as a consequence of the growing costs of production amid the drought that has reduced the capacity of hydropower plants.

With rising exchange rates, debt contracted in foreign currency increases. According to the BCB, the total private foreign debt in Brazil totalizes 208 billion US dollars, about 10 percent of the country’s nominal GDP. Moreover, Brazilian investors, among of them entrepreneurs, tend to

Unemployment and bubble

Petrobras’ crisis has impacted national production chains, such as shipyards, among other oil and gas companies. Companies in these sectors correspond to about 13 percent of Brazil’s GDP, and most of them depend directly or indirectly on the state-owned oil giant’s business to survive. Furthermore, due to disinvestment from ongoing projects subcontractors had to fire employees, generating a domino effect over oil-related activities and local business. The government estimates that about 20,000 workers have already lost their jobs because of the scandal.

Only at Comperj, a new refinery located in Rio de Janeiro’s outskirts, just 6,000 out of 18,000 workers remain in the project;

Also, companies involved in the kickback scandal employ about 100,000 people throughout the country. If punished, they may be prohibited to participate in public works, then being likely to fire most of their current workers;

Moreover, coastal cities that were growing faster due to the perspective of gains from pre-salt extraction, attracting investment in real estate, are now stagnant.

Many analysts consider that with this Petrobras generated a bubble in regions near exploration fields, including areas located in the industrialized states of São Paulo and Rio de Janeiro, but also in some of the largest Northeastern state capitals, such as Fortaleza. In fact, since the beginning of the 2015, the average new price of new houses in the country fell for the first time within four years, decreasing about 1.7 percent. This, however, has not

Increasing taxation

Rousseff's government has just announced strict rules for autonomous white collar professionals, such as lawyers and medical doctors, as they provide services to third parts. Currently many of them practice tax evasion, which has been made harder with new rules for income tax filing, including the identification of clients to the revenue service. The tight rules tend to increase anger with Rousseff among the middle class in particular, notwithstanding the generation of extra revenue.

Moreover, the government suspended the tax breaks had been offered to industrial sectors since 2012