A Test of Brazilience

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A test of “Brazilience”:

What next for Brazil?By Thomas Kamm, Partner, São Paulo

April, 2016


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A test of “Brazilience” A picture making the rounds of social media inBrazil shows Kevin Spacey, a.k.a. Frank Underwood,the cynical and manipulative villainous hero ofTV series House of Cards, grinning in appreciationunder the caption: “Watching today’s Braziliannews coverage.”

It’s easy to understand his enthusiasm. Here’s whathappened in some of the most recent episodes:Facing possible impeachment, the President triesto name her predecessor to a position equivalent to

Prime Minister to help her wheel-and-deal her wayout of the mess. But the country’s judiciary blocksthe appointment after leaked wiretaps (which may be illegal) appear to indicate that it may well bemainly designed to prevent the former Presidentfrom being jailed for alleged corruption.

Meanwhile, the Vice President announces his partyis withdrawing its support for his ticket-matethe President. He calls for his party’s ministersto leave the government - while refusing to leaveofce himself, because if the President is indeed

impeached, the top job is his. When the Vice President accidentally makes public arecording of his draft acceptance speech callingfor “a government of national salvation,” apresidential aide exclaims: “The mask of theconspirator has fallen.”

The impeachment proceedings are being led bythe Speaker of the House. He is himself subject topossible destitution for alleged corruption. He’sassisted by a 65-person committee, about one-quarter of whose members themselves face some

sort of allegation of corruption or misdeed. Oneof them is even the object of an Interpol warrant.

A former Minister who served under the Presidentand Vice President is planning to le a secondimpeachment procedure against the Vice President,saying he is “the real captain of the coup” that healleges is taking place. And the judge at the heartof all the investigations resuscitates an oldcorruption scandal, saying that newly-obtainedevidence may point to the implication of theformer President in a blackmail case surrounding

the unresolved 2002 murder of a mayor.President Francis J. Underwood may indeed havemet his match in Brazil. If you thought that someof the scenes described above are from a ctional

TV series, you’re wrong. They all occurred inthe past few days in Brazil. And if you feelsomewhat confused by this real-life reality show, you are not alone. Brazilians also nd it hard tokeep up with the whirlwind of allegations andaccusations. Parodying former President LuizInácio Lula da Silva’s habit of bragging about hisachievements by saying that they are all rsts inBrazilian history, commentator J.R. Guzzo wroterecently in newsweekly Veja: “Never before in thehistory of this country have we had so many clearopportunities to say ‘Never before in thehistory of this country...’ “

This is the same Brazil that only a few years ago was the star emerging market, the rising globalpower, the land of the future, the B of BRICS. Thecountry today is on the verge of what could be the biggest crisis this crisis-prone nation has everfaced - or a cathartic break from its past. “Brazilis going through one of the most challengingmoments in its history,” Roberto Setúbal, CEOof banking giant Itaú Unibanco, said recentlyat a conference.

Engulfed in a massive corruption scandal, a deeppolitical crisis that threatens to bring down thegovernment of President Dilma Rousseff and the worst recession the country has faced since theGreat Depression (not to mention the outbreak ofthe Zika virus just as Rio de Janeiro prepares tohost the Olympic Games in August), Brazil is beingsubjected to a massive stress test that can eitherlead to a prolonged downward spiral or proveto be a pivotal moment that ultimately sets thecountry back on a more sustainable political andeconomic course. Call it a new test of what could be called “Brazilience,” Brazil’s resilience andresourcefulness in the face of crisis.

Indeed, just as the 1992 destitution of then-President Fernando Collor de Mello oncorruption charges and exhaustion from years ofhyperination paved the way for the 1994 Real Planthat set the country on a 15-year growth cycle thathad some believing that the proverbial land of thefuture also had a brilliant present, today’s crisis

could contain the seeds of a reinvention of Brazil’s business model. “The positive side of the currentcrisis is that it has raised awareness for the need tocarry out reforms,” says Itaú Unibanco economist


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Caio Megale. So for all the apparent mess,investors with an appetite for risk may want totake advantage of the depreciated Real to considerinvesting in this market of 200 million people at atime when assets are cheap.

For now, Brazil is heading into uncharted waters.There are three possible short-term scenarios, allfraught with uncertainty:

Scenario 1:Ms. Rousseff defeatsimpeachment

While polls show that 61% of the populationsupports impeachment, the decision belongs toCongress and depends on the political forces atplay. Impeachment is a multi-step process (see box) and the rst key step will take place as earlyas April 17, when the lower house is expected to vote on whether or not to pass the matter on to

the Senate. For the impeachment procedure tocontinue, 342 members of the House must vote infavor, while the government needs 171 membersto block it. That’s why Ms. Rousseff is franticallyseeking political support and is prepared to offergovernment positions and jobs at state entities toparties and deputies willing to vote in her favor -or simply to not show up to vote against her. The wheeling-and-dealing has reached such a feverpitch that even Paulo Maluf, a member of the Houseand of the special commission on impeachment,

whose long political career has been marred bycorruption scandals (he’s the one with the Interpol warrant against him for alleged money laundering),exclaimed: “I am revolted and nauseated bythis policy of buying and selling (votes). Thegovernment’s action should be in the domain ofa legal defense.” The question is what would Ms.Rousseff be able to achieve if she survives theimpeachment procedure: her popularity and abilityto govern are in tatters, as demonstrated by herrecent (so far frustrated) attempt to appoint FormerPresident Lula to the government. In fact, many

commentators say that if she survives the voteand Mr. Lula da Silva’s appointment is conrmed,he will be the real President of the country. Assuch, wrote Estado de São Paulo in an editorial

entitled “The coup without impeachment,” while Ms. Rousseff claims she is the victim ofa coup attempt, by appointing Mr. Lula da Silvashe waged a coup against herself and “wasdeposed de facto by what we could call a domesticarrangement.” In this scenario, structural reformsare unlikely as the government will try to cater toits leftist base and will need to repay the favors itgranted to stay in power.

Probability of this scenario: 25%

Scenario 2:Ms. Rousseff isimpeached and VicePresident MichelTemer takes ofce

If the House votes in favor of impeachment andthe Senate then conrms the vote, Ms. Rousseff would have to step down for an initial 180-dayperiod and Vice President Michel Temer wouldtake ofce. Although he was elected and reelectedon the same ticket as Ms. Rousseff, the two havenever been close and last December, he even wrote a letter to Ms. Rousseff in which he saidshe showed “complete lack of trust in me” andcomplained he was reduced to a “decorative” role. A 75-year-old constitutional lawyer with a beauty-queen wife 43 years his junior who has his name

tattooed on the back of her neck, Mr. Temer isPresident of the PMDB party but has always been adiscreet politician. His possible appointment is well viewed by Brazil’s business community, especiallysince the October 2015 launch by the PMDB ofa government program named “A bridge to thefuture,” which calls notably for scal adjustment,a more open economy, privatization, more exiblelabor laws and an end to ination-indexationon pensions and the minimum wage. However,a recent poll showed that only 16% of Braziliansthink the low-prole Mr. Temer would do a good

or great job as president, and while he is not theobject of any investigation at this stage, his namehas been mentioned in connection with some ofthe scandals under investigation, and he also faces



possible impeachment, having been elected on thesame ticket as Ms. Rousseff. In this scenario, thechange in government could bring a “condenceshock” that could be a boost to markets and theeconomy, and some limited structural reformscould be implemented.


Scenario 3:

New electionsShould both Ms. Rousseff and Mr. Temer beimpeached or the political situation becomeuntenable, the way out would be fresh elections.In recent weeks, that option has started gainingtraction, and politicians as diverse as Marina Silva,the twice-defeated presidential candidate andformer Environment Minister under Mr. Lula daSilva and Renan Calheiros, the Senate President,have defended that solution. However, lawyers andpolitical scientists see strong obstacles, and such a

move could be contested. It also raises a practicalquestion: who would be the likely presidentialcontenders? Ms. Silva would denitely be one, butshe has yet to articulate a coherent program. Mr.Lula da Silva has indicated he would like to runagain, but his legal situation is in limbo and hispopularity has been seriously tarnished. AécioNeves, head of the Social Democratic Party ofBrazil, who was narrowly defetaed by Ms. Rousseffin 2014, would likely run again, but his name hasalso surfaced in some of the recent scandals. TheCar Wash scandal has also been a political wash,leaving few top politicians untouched.


How didBrazil get intothis mess?The country is actually facing not one,but three simultaneous crises that are

interlinked and feed on each other like avicious circle.

The rst is the so-called Lava Jato, or Car Wash,corruption scandal at Petrobras. What started asan investigation into apparent money-launderingat a gas station in Southern Brazil (hence theCar Wash moniker) has mushroomed into a hugegraft scandal in which top politically-appointedexecutives at Petrobras colluded with contractorsto grant overpriced contracts in return forkickbacks that beneted political parties and

funded election campaigns.Using a form of plea bargaining known in Brazilas delação premiada, under which denunciationsof previously undisclosed misdeeds lead to reducedsentences, the team of investigating magistratesled by Judge Sergio Moro has uncovered a large-scale web of corruption involving a Who’s Whoof Brazilian politics and business. This scandalhas already led to the imprisonment of the CEOsof several construction giants, including MarceloOdebrecht, the CEO of the eponymous Odebrecht

group that is Latin America’s biggest in its sector,the resignation of André Esteves, the CEO of BTGPactual, one the country’s biggest investment banks, allegations that former President Lulais the beneciary of a beachfront triplex and acountry estate, and accusations against severaltop politicians, including the Presidents of theChamber of Deputies and the Senate and theruling party’s whip in the Senate. The most recent wave of denunciations that have leaked to thepress have brought the scandal dangerously closeto the Presidency: The former CEO of construction

company Andrade Gutierrez, Otávio Marquesde Azevedo, revealed that money diverted fromPetrobras and other projects was allegedly used tonance legally-declared contributions to



Ms. Rousseff’s victorious 2010 and 2014presidential campaigns.

The second crisis facing Brazil is an economicone. The situation is so bad that when formerCentral Bank Governor Affonso Celso Pastore was asked recently at a conference what would be his rst decision if he were appointed FinanceMinister, he replied: “Resign!” Indeed, Brazil ndsitself today in the sort of mess some had thoughtit had forever left behind following the 1994 RealPlan: a paralyzing morass of recession, inationand decits. The country has been stripped of itsinvestment-grade rating by all three top globalrating agencies and has been cut to junk. Thecommodities-fueled 7.5% GDP growth postedin 2010 now seems a distant memory: Brazil’seconomy contracted by 3.8% last year, andeconomists are predicting another drop this yearof between 3.7% and 4%. “If the 4% contractionin GDP is conrmed, we would be facing the mostprofound recession in a century,” says Itaú’s Mr.Setúbal. Ination last year returned to double-digits, at 10.67% - although there are signs now

that Brazil’s slowdown is gradually stranglingination as well. Unemployment has nearly doubledin two years to 9.5%. While some countries todayare grappling with negative interest rates, Brazil’s base Selic rate is at 14.25%. Brazil’s gross debt has jumped by almost a third in the past two yearsand now represents 66% of GDP.

The government created much of this situationitself by progressively abandoning the so-calledeconomic tripod that was the hallmark of Brazil’seconomic stabilization plan - a combination of

ination targeting, scal responsibility and aoating exchange rate - in favor of what it called a“new economic matrix” of Keynesian stimulativemeasures, price controls and subsidized credit.The shift was started under President Lula tocounter the 2009 global nancial crisis, but it wascontinued and amplied under Ms. Rousseff. Ithelped her win the 2010 and 2014 elections, but ithas thrown the economy off course. After a half-hearted attempt to restore order by appointingscal hawk Joaquim Levy as Finance Ministerfollowing her reelection, Ms. Rousseff jettisoned

him less than a year later, and his successor,Nelson Barbosa, is left trying to x the mess. Andnow, in a desperate attempt to save her job, Ms.Rousseff and her government have embarked on

another wave of decit spending that threatens to worsen Brazil’s decits and debt.

And this, in turn helps fuel Brazil’s third crisis:a political one. Within months of her narrowreelection in 2014, Ms. Rousseff had already fallento record low popularity levels, and with thecorruption scandal and economic downturn, thingsare going from bad to worse. Although Ms. Rousseffhas not been personally implicated in corruptionat this stage, each new revelation makes it harderto stave off impeachment. The irony is that while aDataFolha poll shows there is widespread supportfor Ms. Rousseff’s impeachment and for Mr.Temer’s as well, the reason invoked is not the onethat has brought millions of Brazilians into thestreets against corruption, but a technical one: sheis accused of having violated Brazil’s Law of FiscalResponsibility and presenting an articially lowdecit by temporarily transferring payments due bythe state to state-controlled nancial institutions.Though the amounts in question are signicant,Ms. Rousseff claims that such maneuvers have been done by previous governments and says she

committed no “crime of responsibility” that would justify impeachment.

In a move that smacked of desperation,Ms. Rousseff recently tried to appoint herpredecessor, Mr. Lula da Silva, to the position ofMinistro da Casa Civil, a sort of Prime Minister orChief of Staff, charged with translating his (nowsignicantly reduced) popularity and political skillsinto support for the government. The appointmentis in limbo after having been temporarily blocked by a Supreme Court justice for possible obstruction

of justice. A wiretap of a conversation betweenMs. Rousseff and Mr. Lula da Silva was releasedsuggesting that the offer of a government post mayhave been designed to help Mr. Lula da Silva escapethe clutches of Judge Moro’s investigation into hisreal estate properties, as standing ministers canonly be tried by the Supreme Court. The recentdecision by the PMDB party to leave the rulingcoalition deprives Ms. Rousseff of another keyally. In what newsweekly Veja called in its latestissue a “super-sale” of government positions andfavors, Ms. Rousseff is now throwing all her energy

into trying to cobble together enough votes tofend off her impeachment.

So where does all this leave Brazil? In the short-term, facing paralysis until there is clearer



resolution. But take a medium-term view andthere are some reasons for cautious optimism.That’s where Brazilience comes in.

Indeed, equally fascinating as the day-to-daydevelopments of the unfolding drama are the less visible undercurrents that are playing out. Bylaying bare the entrails of what makes Brazil’seconomy and political system function, today’shuge crisis is exposing that Brazil’s state-ledgrowth model has run its course and leadingto calls for a rethink of what economist SergioLazzarini has called the country’s “capitalismof links,” a closely intertwined, incestuousrelationship between politics and business in whichlaws, jobs and favors are up for sale while thepopulation watches helplessly from the sidelines.“Brazil has a historical opportunity to dene itsfuture,” political scientist Carlos Pereira told Folhade São Paulo recently.

This will certainly not happen overnight andchanges will be incremental, but consider somerecent signs: Forsaking the Constitution, RenanCalheiros, the President of the Senate and an

ultimate political survivor of a host of scandalsover the past two decades, has called for generalPresidential, Congressional and Gubernatorialelections (including for his own Senate seat) to wipe the slate clean. Former Finance MinisterMaílson da Nóbrega devoted one of his recentcolumns in Veja to a call for the privatization ofstate-controlled oil giant Petrobras, the company atthe heart of the current corruption scandal, whosestatus as a ward of the state is an untouchablesacred cow in Brazil. “In practice, [Petrobras]

has been privatized in favor of groups who usedit to peddle inuence, nance political projectsand enrich themselves,” he wrote. “It would have been difcult for such a catastrophe to happen ifPetrobras had been a private company.” And therepeated street protests that have shaken Brazilsince 2013 attest to the rise of a consuming classthat wants to see a return on the taxes it pays anddoes not want to lose the gains that have come with stability. “We have an analog political classand new, digital voters who don’t want to justlisten, they want to be heard, be players,” Renato

Meirelles, President of polling institute DataPopular, which specializes in the rising middleclass, told business daily Valor Economico recently.

There are some strong parallels to the Collor deMello situation, and Brazil emerged stronger fromit. Brazilians long showed tolerance with veryhigh ination, but it took hyperination to nallymake them accept the tough medicine that brokeits back in the mid-1990s. An apparently weak Vice President, Itamar Franco, took ofce whenMr. Collor de Mello was ousted, and after runningthrough three Finance Ministers, he eventuallynamed Fernando Henrique Cardoso to the post.Mr. Cardoso implemented the Real Plan, and thenleveraged his success in ghting ination into two

successive presidential terms that resulted in majorstructural reforms that paved the way for Mr. Lulada Silva’s important social reforms.

Similarly, Brazilians have long tolerated corruption, but today’s hypercorruption may be what it takesto nally attack it - and the system sustainingit - head-on. By exposing how the strong role ofthe state in the economy and its attendant politicalpatronage have plunged Brazil into today’s mess,the Lava Jato scandal is also pointing to what needsto be xed. In fact, as the PMDB’s program shows,

calls to open up and exibilize Brazil’s economyare rising from several quarters, and the need forpolitical reform, to reduce the number of parties(there are currently 28 in Congress, and they aremore interest groups than parties) reform partynancing and make politicians more accountable,are also emerging. “The failure of ‘presidentialcoalitionism,’ precipitated by the disaster of theDilma government, imposes rethinking the modusoperandi of Brazilian politics,” economist EduardoGiannetti wrote in Folha de São Paulo.

Brazilians have had a taste of economicstability and prosperity and have seen theemergence of a middle class, and they have moreto lose than ever from the perpetuation of thecurrent crisis. So while the headlines bring newrevelations every day and seemingly plungeBrazil deeper into scandal, the very fact that theinvestigation is proceeding unabated is a sign ofthe vitality of Brazil’s democratic institutions. Thecoming months will be messy, but they could welllay the ground for measures that could ultimatelyconsolidate democracy and strengthen the world’s

seventh-largest economy. In the meantime,however, it’s likely that Francis Underwood willhave a few more reasons to smile appreciatively ashe watches the Brazilian news ow.



Brazil’s impeachmentprocess: A step-by-step guideArticles 85 and 86 of Brazil’s 1988 Constitution set out the procedures forimpeachment. Following is a summary of the key steps:

In this particular case, there is a further element of uncertainty, as Vice President Michel Temer ispossibly facing impeachment proceedings as well, having been elected on the same ticket as Ms. Rousseffand having, while in his role of acting President while Ms. Rousseff was out of the country, approveddecrees that contributed to the accounting maneuvers for which Ms. Rousseff is being threatened withimpeachment. Should both the President and the Vice President be removed from ofce, a new election iscalled with 90 days.

Step 1:The lower house, or

Chamber of Deputies,sets up a 65-memberspecial commissionto determine whetherthe impeachment bid is valid. This was done on March17. President DilmaRousseff gets topresent her defense,and the commission’srapporteur

then issues itsrecommendation.

Step 2: Following the special

commmission’srecommendationthis Monday by a38 to 27 vote thatthe impeachmentprocedure shouldproceed, the fullHouse votes onit. Ms. Rousseff’sopponents need togarner 342 votes, ortwo-thirds of the

house members.Ms. Rousseffneeds to garner 171 votes or enoughabstentions to defeatimpeachment. The vote could take placeas early as mid-April.

Step 3: Should 342 or more

members of thehouse vote in favorof impeachment,the case then movesto the Senate. TheSenate also sets up aspecial commission.If a simple majorityof the Senate votes in favor ofimpeachment, Ms.Rousseff is removed

from ofce for upto 180 days and VicePresident MichelTemer takes over.The Senate vote couldtake place as soon asearly May.

Step 4:The Senate uses

the 180-day periodto conduct its trial,chaired by thePresident of theSupreme Court.If two-thirds or moreof the 81 Senators vote to impeachMs. Rousseff, sheis permanentlyremoved from ofceand is banned from

public ofce for eight years. If less thantwo-thirds of theSenate votes in favorof impeachment,Ms. Rousseffreassumes ofce.



For more information

Thomas Kamm is co-head of the São Pauloofce. He has extensive experience in diverse

aspects of corporate communications, includingcorporate positioning, media relations, nancialcommunications, M&A and IPOs. Thomas acts asa senior consultant to clients on corporate andnancial issues, with a particular emphasis onretail and consumer goods.

Thomas joined Brunswick in Paris in 2005,prior to which he worked for 18 years as aforeign correspondent and bureau chief forThe Wall Street Journal in Europe, South America – he was based in Rio de Janeiro from

1989 to 1994 - and Africa. Subsequently, he was vice-president for communications andcorporate affairs and a member of the ExecutiveCommittee of PPR (now called Kering), the Frenchluxury and retail Group.

Contact BrunswickSão Paulo

Address

Avenida Dr. Cardoso de Melo,1340, Sala 42, Vila Olimpia,Sao Paulo, SP, Brasil, 04548-004

Tel: +55 11 3076 7620

Email: [email protected]

www.BrunswickGroup.com

Brunswick is the global leader in nancial and corporatecommunications, providing senior counsel to clients around theglobe on critical issues that afect reputation, valuation, andbusiness success.

Thomas Kamm,Partner, São Paulo

+55 11 3076 [email protected]

Brunswick Group

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A Test of Brazilience