“My opponents have gone crazy, [but] let them come for me. I will hang on to power until the final day” — Nicolas Maduro
The history of postcolonial Latin American politics is replete with examples of turmoil and unrest and it now appears as though we may see not one but two coups before the end of the calendar year. The quote above is from Venezuela’s hapless autocrat who is desperately clinging to power by selling the country’s impoverished citizens on his own fantasy wherein Caracas is locked in an epic ideological struggle with Washington.
To the south, there’s a far more serious (in terms of ramifications for the global economy) drama playing out. Brazilian President Dilma Rousseff is locked in a battle for her political life and for the survival of the Worker’s Party, the leftist movement founded by her mentor and former President Luiz Inácio Lula da Silva.
Rousseff could be impeached as early as May on charges that she cooked the fiscal books in 2014 in the lead up to elections. The President is also attempting to dispel the notion that she was in any way involved in bribery and corruption at Petrobras, where she was chairman. So far, the car wash probe – which is being conducted by “rockstar” judge Sergio Moro – hasn’t reached the presidential palace’s doorstep, but Rousseff feared that might change when Lula was detained earlier this month. The former President’s arrest came after Senator Delcídio do Amaral delivered damaging testimony against Rousseff as part of a plea deal with prosecutors.
In order to save Lula (and likely herself) Rousseff offered her mentor a ministerial position that would shield him from prosecution. Long story short, the gambit backfired. Moro tapped her phone and released embarrassing tapes to the media triggering massive street protests, the courts blocked Lula’s appointment, and Rousseff’s enemies in Congress pointed to the Lula debacle as still more evidence of why she needed to be impeached.
Meanwhile, the economy continues to crumble.
That, in a nutshell, is where things stand now and despite the odds, Rousseff is doing her best Maduro impression. “I will never resign under any circumstances,” she told a gathering of legal experts on Tuesday. “I have committed no crime that would warrant shortening my term.”
That will ultimately be up to a newly-formed impeachment committee (¼ of which are themselves facing Supreme Court charges) and as Reuters notes, “the political survival of Brazil’s first female president depends largely on her main coalition partner, the centrist Brazilian Democratic Movement Party [where] growing numbers of lawmakers want the party to leave Rousseff’s government.” Although a decision could be reached at a March 29 executive committee meeting, some members of the party want to push a final ruling to April.
PMDB votes could ultimately decide Rousseff’s fate on the impeachment committee and if she is indeed ousted, party leader and VP Michel Temer would take over the presidency. Of course as Globo reminded us earlier today, Temer may himself be a target in investigators’ probe.
And while lawmakers and judges battle it out for political supremacy, the central bank and its beleaguered President Alexandre Tombini are desperately attempting to rein in excessive BRL strength in an effort to ensure the currency can adjust to macro fundamentals and thus help cushion the economy.
Reverse FX swaps have helped to put a lid on the BRL appreciation that’s accompanied growing calls for Rousseff’s ouster. Here’s the total stock as things stand now:
As Goldman wrote last week, “to increase the efficiency of the macro adjustment and lessen the output/employment loss of the required rebalancing, the authorities should restrain BRL/USD appreciation below 3.70.” We’re at 3.66 now:
Apparently, the BCB is going to try to thread the policy needle, as it were, by using reverse swaps to contain the pace of BRL appreciation while simultaneously using expected BRL strength to justify rate cuts. If that sounds like a difficult task to you, that’s because it is.
Anyway, the real economy continues to collapse. Last month was the worst February on record for jobs…
… as employment fell 3.6% Y/Y and real wages declined by 7.5%. Here’s Goldman’s breakdown:
Employment declined by a large 3.6% yoy (-841K jobs). However, the economically active population declined 1.1% yoy (-276K individuals left the labor force). The variation (decline) of the economically active population went in the opposite direction of the +1.4% increase in the working-age population. Hence, the significant decline in the participation rate prevented an even sharper acceleration of the unemployment rate.
We expect the labor market to deteriorate further. Policy tightening, depressed consumer and business confidence, and tighter financial conditions are expected to lead to a deep recession in 2015-16, visibly higher unemployment rates in 2015 and 2016, and declining real wage growth.
We also got a look at trade data for February and that too was disaster as the country posted a current account deficit of $1.9 billion for the month on expectations of a tiny $150 million shortfall. About the only thing good to say about it was that it was better than last February’s mammoth $7.2 billion deficit. Commenting, Goldman harkens right back to the BRL discussion: “Reacquiring export knowledge and rebuilding such a culture will likely take a few years of learning; something that requires the expectation of a relatively cheap-to-fair-value BRL for some time to come, and also a conservative monetary policy stance to induce a gradual but permanent decline in the relative price of non-tradable over tradable goods.” Again, a delicate monetary balancing act.
It’s truly difficult to know what to say at this point. The country is rapidly becoming a banana republic and may well go down in history as one of the most spectacular examples of economic and political backsliding the modern world has ever seen. We won’t even speculate on the fate of the Olympics.
We’ll simply close by paraphrasing something Lula said to Rousseff on one of the phone calls Moro secretly recorded last week: “It’s all fucked [and] everyone thinking that some kind of miracle is going to happen.”
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