The Brazilian Economic Recession

This report exposes what triggered Brazilian current economic recession, introducing the operation Car Wash and presenting how the impeachment and measures taken by the current president aim to reverse this situation. Interest rate, inflation and many other indexes are exposed to illustrate the whole scenario.

Operation Car Wash

By Matheus Falcão

The operation Car Wash is the largest corruption scandal and money laundering investigation taken place in Brazil. It is estimated that U$9 billion were deviated from Petrobras’ resources, the largest state-owned company in Brazil. Furthermore, many people involved in the scheme were politicians. The first phase of the investigations led in March 2014 by the Federal Court of Curitiba pointed out four criminal organizations led by “doleiros”, operators of the parallel exchange market, who were investigated and prosecuted. Later on has the Federal Prosecutor’s Office collected evidence of an immense corruption scheme involving Petrobras. In the scheme, dating at least ten years, big contractors have organized themselves into cartels, paying bribes to senior state executives and other public officials in exchange for contracts to construction firms at inflated prices. The bribes varied from 1% to 5% of the total amount of the overpriced contracts and then were distributed among financial operators that made illicit transactions between Petrobras and the contractors. Shell companies were used in the laundering of deviated public resources. Among the involved, we can highlight important politicians, such as the former president of the Chamber of Deputies Eduardo Cunha, the former politician José Dirceu, the current president Michel Temer, the former president José Sarney and the former president Lula.


By Matheus Falcão

Among so many outstanding events in 2016, one of the most impacting was the impeachment of the former President Dilma Rousseff. The process was characterized by its controversy and opinion’s divergence between the Parliament and the society. It was led by the former president of the Chamber of Deputies Eduardo Cunha and it started on the 2nd of December 2015, and finished on the 31st August 2016. Dilma Rousseff’s impeachment can be characterized by the moment of economic crisis and low popularity of the president. Dilma, in the beginning, had a vast allied force in the Congress but that was diminishing throughout the trial. On the other hand, she had a strong support from social movements and trade union organizations, which organized demonstrations against the impeachment. The decrees have authorized supplementation of the budget by more than U$30 billion and contributed to the noncompliance of the fiscal goal of 2015. The government knew about the irregularity because it had already requested the target’s revision when the decrees were issued without consulting the Legislative, as it should had been done before the new goal was approved. Jurists have claimed that the former president had committed a crime of fiscal responsibility; the practice is called “pedalada fiscal” and basically means the issue of credit-opening decrees without the authorization of the Congress. According to the lawyers, the accumulation of debts served to manufacture fiscal surplus that did not exist and to create a positive situation of the public accounts that was not true. As they stated, the purpose of the “pedaladas”, would have been, therefore, to hide the real fiscal situation of the country. In theory, two punishments were imposed: the loss of the mandate and the disqualification of any public function for eight years. With the impeachment, Dilma has definitively lost the mandate of president of the Republic. On the other hand, the Senate has decided not to suspend Dilma’s political rights. Several changes have occurred in the country’s economy after the impeachment. The adoption of a strong economic team resulted on the creation of several reform proposals. Although they are unpopular measures, they are necessary for solving the urgent problems of Brazilian’s economy. These include pension reform, labor reform and the creation of a ceiling on public spending (PEC 287). In addition, one of the consequences of this shift in power was disinflation and interest rate reduction what help to boost the economy and give hope for a way out of the recession.

An analysis of the Gross Domestic Product

By Raphael Matheus

Between 2003 and 2008, the Brazilian economy expanded at a 4.2% pace per year. After the start of the financial crisis in 2008 and the end of the commodities super-cycle, notwithstanding great efforts to stimulate the internal demand, the Brazilian economy began to slow down and dwindled in the following years, especially in the last three. In 2015, the Brazilian GDP contracted 3.8%, and 3.6% in 2016. Due to tighter fiscal and monetary policies combined with more restrictive liquidity conditions in major economies, the Brazilian economy needs to reposition itself. A broad adjustment process is required to improve fiscal accounts and the efficiency of public programs in order to set the path for a renewed growth cycle. The overall deterioration of the Brazilian economy in the last years has produced a significant reduction in the country’s capacity to grow without generating distortions. The slowdown of the Chinese economy, the consequent volatility in commodity prices, the mismanagement of local economic policies (in particular of the fiscal policy, which has contributed to the emergence of a fiscal crisis), the lack of reforms to spur domestic productivity, among other factors, have all contributed to a fall in Brazil’s potential GDP. In fact, these factors have negatively affected each one of the components of potential GDP, namely capital, labor and overall productivity (known as total factor productivity or TFP). The GDP growth estimate in 2017 is 0.45% and 2.5% in 2018, which reflects not only the deterioration recorded in the last few years but also less positive prospects for the future in the short run.

Inflation and Monetary Policy

By Raphael Matheus

Accelerated disinflation is under the way. Strongly aided by a sharp currency appreciation and a long recession, the headline inflation rate sharply declined to 5.35% YOY (Jan-2017) from 10.7% YOY (Jan-2016). The inflation target range is already set at 4.5% for 2017. Looking ahead, the official and private consensus anticipates a 4.1% YOY inflation rate for the current year. In this scenario of anchored inflationary expectations, the central bank has activated an aggressive monetary easing cycle. The administered policy (SELIC) interest rate has been reduced by 240 bps to 11.25% over the past four months. Market participants discount the continuation of aggressive interest rate cuts to close this year at 8.75%.
GPD Growth

Figure 1: GDP Growth. Source: Boletim Focus – Central Bank

Economy’s turnaround and the repatriation

By Gabriel Melo

Between 2005 and 2010, an impressive growth rate in the Brazilian GDP was observed, with the only exception in 2009 as a result of the Subprime crisis. Even more impressive was the simultaneous stabilization of the public debt during the same period. Right after 2013, these golden years have turned upside down with a zero growth of our GDP followed by two years of a deficit of almost 4%. A not so surprising turnaround since much more money was spent than reinvested by the government at that time. Not taking measures would result in more debt, less purchasing power, less tax collection and a total collapse of our economy. Even though in 2016 many measures started to be taken, hosting the Olympics made the government so optimistic that now we have even more debt than before the event (Rio de Janeiro owns private companies U$30 million for instance). One measure aiming to increase tax collection was taken by the ex-president Dilma Rousseff in January 2016, the repatriation of legal though undeclared capital retained outside the country by Brazilians. The cost of the regularization for the asset’s retainers would be 30%. This law provided amnesty on tax evasion to these specific assets. In 2016 was collected a total of U$15 billion. Projections say that a new repatriation project for 2017 would still rise about U$6 billion; therefore, the chamber of deputies approved a project for a new repatriation this year.

Tax Collection

Figure 2: Tax Collection and the GDP Source: Receita Federal

GPD Growth rate x Public Debt

Figure 3: GDP x Public Debt Source: Central Bank

Temer’s administration

By Vitor Procópio

Brazil, at the beginning of 2016, was in a recession without any expectation of getting out. The “New Economic Matrix” of Dilma’s administration has fallen apart. After the impeachment, the country has had a president with great politician experience, a debilitated economic situation and a grand rejection for PT and left wing political parties. During the XXI century, this propitious situation to do unpopular reforms has never been seen and the new president administration has been using this opportunity. In less than a year of Temer’s administration, the country has already improved a lot, from an expectation of negative GDP growth to a positive one in 2017. This market mood is based on the unpopular, but needed, reforms that promote an economic recovery in medium to long term. It is important to mention that Brazil is on its way to re-establish its economic situation without raising taxes! Making an analogy between Brazil and a person bleeding, the new governance adopted measures to stanch the bleeding, since just the expectation of a recovery is not enough to make the country really improve. These short-term measures consisted, mainly, of fiscal help to the states, income increase, supporting companies, reducing business bureaucracy and the governmental debt. However, the person would bleed again if nothing with a long-term character was made. With an alarming debt situation, high inflation, low economic activity, provision for more growth in federal expenditures without a corresponding increase in income, the government adopted further measures, such as the Constitutional Amendment number 95 from 2016, the Reform in Social Security and the Reform in Labor Laws.

The Proposed Constitutional Amendment 95

By Gustavo Morais

The Proposed Constitutional Amendment (PCA) 241, enacted in December 2016 as Constitutional Amendment 95, aims to establish a new fiscal regime and a limit for Brazilian’s total primary expenditure. This measure is valid for 20 years, affecting all the powers of the Union, and such amendment may be reassessed in the tenth fiscal year. The spending limit will be calculated based on the expenses of the previous year, being adjusted annually according to the inflation, not representing a real raise of the expenditure limit. The government intends to abandon the procyclical spending system, where a cost tends to grow together with the economy. By doing that, spending grows in economy’s positive times, however, turns unsustainable in periods of recession, requiring major adjustments. In the new model, public spending would be adjusted in a smooth and projected manner, thus entering a countercyclical regime, where expenditure has a real trajectory and revenues vary according to the economic cycle, allowing the possibility of saving and surplus. Another issue to be regarded is the possible lack of compliance in public finance due to increasing expenses with Social Security, especially retirement, added to the minimum expenditure in health and education that the constitution obliges, that could shorten the budget towards other governmental expenses. Thus, the imposed rules would only work with governments imbued with fiscal responsibility. This reinforces the importance of Brazilian’s Social Security reform approval, so this expense will not hinder Brazilian economic growth. If such limit of expenses is surpassed, some fences shall be applied to the Powers or departments in exercise. Those include limits to concessions, public staff’s salary increments, creation of new public offices, or any other new admissions that would require a budget enlargement.

The Reform in social security

By Vitor Procópio

Currently the Social Security and the Continuous Benefit Render (CBR) are already 54% of the expenditures without considering interest. With a raise of the benefited population and the reduction of the contributors, considering the Brazilian demography course, these expenditures will pressure investments in education, health and safety for a reduction. The existence of a social security deficit is a fact; the people that do not agree with it do accounting tricks with data of 2015, since that even in 2016 they were not able to demonstrate a surplus. The reform makes the public and private servers’ retirement converge, since the social security cannot be the problem resolution for every difference between public and private sectors attractiveness. It will promote more equality, since the majority of public servers compose the group of 1% richest people in Brazil. Another point of the reform is about the change of the minimum age up to 65 years old, since life expectation in Brazil is really close to life expectation of the wealthiest European countries and it does not considerably diverge between poor and rich people in Brazil. With the reform, at the age of 65 years old and 25 years contributing the person retires receiving 76% of the salaries average, increasing it by 1-point basis each additional year of contribution. The reform proposes a better regulation for the contribution of the rural workers, since information is nowadays available much easier at the rural environment than before, thus, it is easier to regulate. In relation to the Continuous Benefit Render (CBR), there are many flaws in its system that allows accumulation of benefits that are not coherent with the CBR goal, since it is a program for the poorest. Therefore, the social security, as a mechanism of transferring income, does not demonstrate equality, thereby the poor people are the less benefited, and it promotes unsustainable expenditures in the long-term.

Labors’ Law Reform

By Vitor Procópio

The unemployment rate in Brazil is at 13,2% for the first time, since 2002. Beyond that, Brazil has one of the worst business environments of the world. With rigid, outdated and incoherent labor laws. If accepted, the Reform of Labor Laws will improve the business environment in Brazil, more people will be employed, and therefore, it will cause a pressure for the improvement of the country, its economic situation and the financial situation of the families.

Unemployment rate

Figure 2: Unemployment rate Source: IBGE


By Gabriel Melo

The presidential change as well as the new economic policy together with the asset’s repatriation favored the Real against the Dollar. Moreover the gradual raise of the American interest rate favored countries in development, in special Brazil by virtue of the positive economic perspective starting this year and intensifying in 2018. Simultaneously has the Central Bank of Brazil executed auctions of 6 thousand swaps as a way of holding back the dollar drop to keep the Brazilian market more competitive.


Figure 5: BRL/USD exchange rate Source: Reuters

Consumer Confidence Index (CCI)

By Gabriel Melo

The consumer expectation’s survey made by FGV/IBRE is a monthly research that aims to quantify the consumer’s feeling regarding to the current scenario of the economy and personal finance. Together with the retail market, has the consumer confidence, and therefore the tax collection and the GDP, constantly dropped down from 2014 until December 2016. In March this year the index has reached the highest level (85,3) since December 2014. The cutback of Brazilian’s interest rate and the decrease on inflation’s level are the main reasons for the raise in confidence.


Figure 6: Consumer Confidence Index Source: FGV/IBRE

State’s crisis

Por Gabriel Melo

The recession has violently hit the financial balance of the majority of Brazilian’s states. With a minor tributary collection, not only the federation but also the states collect fewer taxes. Many states lack money for hospitals, public employees’ salary, public security and education. The 26 states together with a federal district registered a deficit of U$18 billion in the first semester of 2016. In August 2016 has the chamber of deputies approved a project of law that renegotiated the state’s debt with the National Union. The states received an extension of 20 years to repay the whole debt to the Union and did not have to pay any further debt until the end of last year. The decision avoids the payment of U$16 billion out of the states cashier to the Union, according to the Finance Minister, Henrique Meirelles. Worrisome states like Rio de Janeiro have been taking many measures in order to reduce its expenses and increase its tax collections. In the particular case of Rio de Janeiro, the prediction to have a surplus is only in 2024.

State Crisis

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