Welcome Back the Bad Old Brazil

In the end, we make our own hell.

It wasn't supposed to be this way: Brazil hosting the 2014 World Cup and the 2016 Olympics to boot was meant to signal its arrival on the world stage. After years of epitomizing the image of Latin American backwardness--slow growth, high corruption, soaring inflation and a plunging currency--these marquee sporting events were meant to showcase the "new" Brazil: a dynamic young economy powering ahead as one of the BRICs.

Unfortunately, things have taken the wrong turn as Brazil flirts with recession time and again, corruption has driven its largest company Petrobras into the gutter together with the many firms dependent on it, and a dive-bombing real has sent inflation improbably high even as the world at large seems to have entered a deflationary situation. With a drought making things worse, all the fates are aligned against Brazil. Consider Petrobras as the very picture of the broken Brazilian dream:

Today the company epitomizes everything that is wrong with a Brazilian economy that has been sputtering for the better part of four years: It’s mired in a corruption scandal that cost the CEO her job this week; it has failed to meet growth targets year after year; and it’s saddling investors with spectacular losses. Once worth $310 billion at its peak in 2008, a valuation that made it the world’s fifth-largest company, Petroleo Brasileiro SA is today worth just $48 billion.

While Brazil’s decline on the international stage has been playing out since the commodities-driven economic boom first began to fizzle in 2011, the corruption case at Petrobras deepens the growing sense of crisis in the South American country. The government is posting record budget deficits after a collapse in prices for the soy, oil and iron that the nation exports; Sao Paulo is running out of water amid the biggest drought in decades; and the real dropped the most among major currencies in the past six months. 

Fittingly enough, the epitaph for the boom-boom, go-go years comes from no one other than the guy who coined the BRICs term himself, Jim O'Neill:

“Brazil seemed great during close to 10 years of rising commodity prices and a very positive terms of trade,” Jim O’Neill, the former Goldman Sachs Group Inc. chief economist who coined the BRIC acronym and who is now a columnist for Bloomberg View, said in an interview from London. “It disguised lots of underlying problems and of course it made policy makers lazy and allowed bad behavioral habits to go on, as this Petrobras story epitomizes.”

It wasn’t supposed to go like this. In the halcyon days, the country was awarded rights to host the 2014 World Cup soccer tournament and the 2016 summer Olympics, events that officials sought to use to highlight Brazil’s arrival as a global power. The nation was in the midst of the kind of economic expansion it hadn’t seen in decades, posting growth of more than 5 percent in three out of four years. 

The knock-on effects of Petrobras being mired in scandal cannot be underestimated:

In addition to the political headache for Ms. Rousseff, the scandal is weighing heavily on Brazil’s economy. Petrobras isn’t just Brazil’s largest company, it is the single-biggest motor of infrastructure spending, accounting for around 10% of the nation’s total capital investment annually. An aggressive expansion of its deep water oil production in recent years has generated billions in spending on drilling platforms, pipelines, refineries, transport vessels and other projects. That in turn has created hundreds of thousands of jobs for Brazilians up and down the supply chain. 

It's kind of sad to think that Brazil was little better than a Russia or Venezuela strutting its stuff while commodity prices were elevated. Some may have thought they would stay at such high levels or head even higher buoyed by ever-soaring global demand for commodities led by the Chinese, but no. There remain economic cycles, and Brazil apparently doesn't have a Plan B involving other non-commodity sectors. I guess that old chestnut the "resource curse" still deserves attention.