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The ground floor of the office tower housing Rio de Janeiro’s state finance department is boarded up, as if girding for a storm. However, the plywood cladding is there not to protect the offices from strong winds but from the state employees who have been staging violent protests against the budget cuts and salary delays wrought by a crisis in the government’s finances.
The deep cuts forced the finance secretariat to reduce the number of security guards protecting its building, enabling protesters to storm its offices. “Every day is agony,” says Julio Bueno, Rio state secretary, of his efforts to balance the budget. “The only way out is for Brazil to start growing again.”
Following a vote in the senate last week to suspend President Dilma Rousseff and begin impeachment proceedings against her, analysts say it will take months if not years to reverse an economic malaise unleashed during the final years of her Workers’ party (PT) rule.
An interim government led by Ms Rousseff’s vice-president, Michel Temer, has been appointed to take the helm during her impeachment — which could take up to six months — and perhaps beyond if the senate finds her guilty of charges of budgetary crimes. Some are sceptical of the ability of Mr Temer, an old-guard politician, to turn around the economy. But for most Brazilians, change — any kind of change — cannot come soon enough. The ousting of Ms Rousseff has strengthened the currency, the real, about 11.6 per cent against the dollar this year.
A nation that only a few years ago boasted of its rising economic status in the world is suffering a bewildering reversal of fortune. After growing 7.5 per cent in 2010, the year before Ms Rousseff took office, gross domestic product last year contracted 3.8 per cent and is expected to shrink again this year. From a record-low unemployment rate of near 4 per cent in December 2014, the jobless rate has reached 10.9 per cent. A sense of gloom has come over the country less than three months before the opening ceremony of the Olympic Games in Rio’s Maracanã stadium.
Mr Temer will be seen as a success, analysts say, if he can stabilise the economy before elections scheduled for 2018. Actual growth would be a miracle. His ability to carry out important structural reforms, such as to Brazil’s budget and expensive pension system, is questionable given the political uncertainty and with part of his new cabinet already implicated in corruption investigations even before taking office last week.
“The people who will manage the country for the next two years have a great responsibility towards young Brazilians,” says Paolo Dal Pino, president of Latin America for Italian tyremaker Pirelli, which holds close to 50 per cent of the new tyre market in Brazil. “If they don’t do what we hope they will do, we will lose 10 years.”
Wanderson da Silva Araújo is feeling the crisis keenly. His “office” is Rio de Janeiro’s Copacabana beach, where he rents out chairs and parasols. To the untrained eye it looks like any other sunny midweek lunchtime.
As the waves crash on to the city’s most famous stretch of sand beach vendors try to sell everything from sunglasses to grilled cheese on sticks — a Brazilian beach specialty — to scores of sunbathers.
However, for Mr da Silva Araújo it is a sorry sight. “Look at all the people lying on the ground,” the 39-year-old says, pointing to groups of bronzed bodies splayed out on the sand for as far as the eye can see. “A few years ago, they would have all been sitting on [my] chairs.”
As the recession bites, beachgoers in Rio are spending less, he says. “Yesterday I made a loss of R$70 ($19.80),” adding that he is considering taking on work as a taxi driver with Uber to make ends meet. “Since the beginning of the year it’s been very tough,” he adds.
He primarily blames the government for its poor management of the economy, as well as the slowdown in Chinese demand for Brazil’s commodities. However, Mr da Silva Araújo acknowledges that corruption and wrongdoing is not limited to the PT nor politicians. “It’s hard to do things by the book in Brazil.”
The crisis has its origins in the exhaustion of a consumer and credit boom fostered by Ms Rousseff’s predecessor, PT founder, Luiz Inácio Lula da Silva — or Lula — during his eight years in power to 2010. By the time Ms Rousseff took office in 2011, Brazilian households were already saturated in debt, leaving them unprepared as the commodities supercycle that fuelled so much growth during the Lula years was ending.
Ms Rousseff tried to counter the slowdown by keeping the fiscal taps open. Congress accuses her of trying to disguise her largesse by placing part of the spending off-budget on the balance sheets of the state banks. It is for this alleged move that she is being impeached. The strategy failed as markets took fright at Brazil’s deteriorating public finances.
Corruption also played a huge part, say analysts. An investigation into a scheme at the state-owned oil company Petrobras, in which mainly ruling coalition politicians collaborated with directors and contractors to exchange bribes for project tenders, has implicated much of Brazil’s congress and a large part of its oil and construction industries. Rio’s finance secretary, Mr Bueno, says the subsequent implosion of Petrobras and its contractors, along with the sharp drop in the oil price, has drastically undermined the state’s income.
Beyond Rio’s golden shores in the Atlantic deepwater lie the giant offshore oil finds that Petrobras was developing before the crisis took hold. Rio state’s royalties from oil fell 38 per cent to R$5.5bn in 2015 compared with a year earlier. The state is suffering a deficit of about 2 per cent of its GDP.
Brazilian states cannot issue debt to fund deficits without consulting the central government. But Brasília, with its own national deficit running at about 10 per cent, is reluctant to allow a further blowout in government finances. Like other states, the problem in Rio is unfunded pension liabilities — the state spends more on the retired than it does on active workers.
State governments are responsible for health, education, police, firefighting and transport. Aside from Rio, São Paulo — Brazil’s richest state — and the southern region of Rio Grande do Sul, are among those facing acute problems in just balancing their budgets.
In Rio, police lack petrol for their cars and ammunition for their guns and there have even been reports that they were economising on paper needed for witness statements. “Our police cars, with little fuel, don’t go out much,” says Fernando Bandeira, of Rio’s civil police union. “We are doing very little training with live ammunition,” he adds.
It is not only public servants who are suffering. The fallout from the recession and even the Petrobras scandal threaten the poorest in society, such as Wallace Mendes Machado.
He relies on a charity, Saúde Criança, based in a small house at the edge of the forest that surrounds the city’s Christ statue, to help provide medical care for his three-year-old daughter Layanne. Saúde Criança has had its funding cut after one of its principal donors became implicated — it is accused of paying bribes — in the Petrobras scandal.
It still provides help to Layanne, who was born with severe physical and mental disabilities after being momentarily starved of oxygen at birth. While the charity is helping him prepare a lawsuit against the hospital where she was born, it offers the daily medical supplies he and his wife need to care for Layanne, including syringes so she can be fed directly into her stomach.
The recession has made life even tougher for the family, says Mr Mendes Machado, who earns a commission from selling orthopaedic mattresses.
“Sales have fallen a lot — they are down about 60 per cent this year,” says the 34-year-old. Papayas, which Layanne needs to help her digestion, used to cost R$5 for eight at the end of last year — now they cost R$5 each, he says.
He is reluctant to blame anyone for the recession but says the local government has been “too ambitious” in spending huge sums on preparing to host the Olympics rather than investing in hospitals. However, he remains positive about the future and plans to open his own restaurant one day. “Of course I’m optimistic; I’m Brazilian!”
Foreign investors are watching Brazil closely too. Those living in the country, such as Pirelli’s Mr Dal Pino, have felt the deterioration in their own daily lives. A resident of Rio, he says the city is less safe: “Ipanema and Leblon, that were normally very quiet, now everyday there is something [a crime] happening,” he says, referring to the beachside suburbs near Copacabana.
The disappointment for foreign investors is how deeply the Brazil growth story has failed to meet expectations. Mr Dal Pino recalls that in 2013 Brazilian car sales reached 3.7m — making it the world’s fourth-largest market. Anfavea, the Brazilian carmakers association, had forecast this would reach 5m in 2018. “This year, the consensus estimate around car production is 2m. It’s a huge fall,” he says.
The final days
The last days of Ms Rousseff’s government have not helped. Last year, she raised the minimum wage — against which pensions and other benefits are indexed — by nearly 12 per cent even though the economy was shrinking. Still, Mr Dal Pino says he remains optimistic. Brazil’s economy is not in as bad a state as Argentina’s was with capital and export controls in place and yet there was a strong rebound in confidence there after Mauricio Macri, seen as a more market-friendly president, was elected.
“They [the new government] have a short time to get things done . . . during the first 100 days we will see a lot of stuff happening,” says Mr Dal Pino.
The crisis has also provided some business opportunities, especially for those specialising in online services. Cristiano Simões, owner of S7 Study, a company specialising in placing exchange students offshore, says the market for Brazilians studying abroad was already growing by 20-30 per cent. “With the crisis, it has grown more,” he says, as young Brazilians seek opportunities in overseas labour markets.
Mr Bueno refuses to comment on whether a Temer government will be an improvement. He does, however, criticise PT policies, such as a law that restricts foreign investment in the offshore oil finds and the government’s lax handling of the federal budget.
“With a more restrained fiscal policy, you would have more space for Brazil to grow again. On the question of oil, the government produced legislation that was completely misguided. These are things that if you fix rapidly, you will get rapid results,” he says.
Back at Copacabana Mr da Silva Araújo says he is cautiously optimistic about his country’s future. “We Brazilians have learnt the hard way not to trust politicians,” he says. “But I like change, we need change.”
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