Rio Gringa

Ten Issues to Watch in Brazil in 2016

All eyes are on Brazil this year with the Olympics front and center, followed by the House of Cards-esque impeachment process. But there's a lot more to keep an eye on in 2016.

I checked in with several Brazil-based experts - including political scientist Mauricio Santoro, Rio blogger Julia Michaels, and AP journalist Mauricio Savarese - and did research of my own. Beyond the Olympics and the impeachment process, here are the issues to watch in 2016.

Corruption scandals: The Petrobras corruption scandal never seems to end, while Operation Zelotes has ensnared Lula's son and major corporations. The evolution of these scandals, or potentially new ones, will have a big impact on the political crisis, and even the economy.

Eduardo Cunha's fate: A major player in the impeachment proceedings, the lower house speaker is accused of a host of corruption charges. He's in danger of losing his position, and even potentially of getting arrested. If he goes down, other powerful politicians involved in corruption scandals could follow.

PMDB convention: In March, the centrist party just barely holding the president's coalition together will meet. There are major rifts in the party over whether to support impeachment with different players jockeying for power - including the vice president. The convention will determine how this powerful party positions itself.

Municipal elections: Voting for mayors and local officials takes place in October. This is the first election during which corporate campaign financing is banned after a 2015 Supreme Court decision. It's sure to change the dynamics of the campaign trail and the process overall. The election will also be a litmus test for the parties that best weather the political crisis, and will be a preview of what's to come in 2018, when presidential elections take place.

Protests: Will history repeat itself? This month, a violent protest over transportation fares took place in São Paulo (sound familiar?). And last year, right-leaning protests calling for the president's ouster took place, which could continue into this year, as could the counter pro-Dilma demonstrations. Protests about police violence are another possibility, especially in Rio and São Paulo. The Olympics could spark a new round of mega-event demonstrations. And with the economic and political crisis in full swing, Brazilians have even more to demonstrate about than in 2013. Protests may not just impact the Olympics, but the impeachment process, too.

Budget crises: The economic downturn, the Petrobras scandal, and the declining price of oil have meant bad news for state and local governments. Last year, a debt crisis rocked Rio Grande do Sul, one of the country's wealthiest states, and Rio de Janeiro is currently facing a major public health system crisis. In Minas Gerais, state public employees are threatening to go on strike after the government announced salaries for the first three months of the year would be delayed. How and where these debt crises play out will be important, as well as how they affect important services like health and education.

Electoral court decision: The court is slated to announce a decision on a case evaluating whether the president and vice president were legally elected in 2014 based on alleged wrongdoing in campaign financing. If the court rules against them, they could be pushed out of office.

The value of the real: In 2015, the real fell to its lowest level in two decades, close to R$4 to the dollar. It's affecting the economy and it's made it harder for Brazilians to travel abroad. Will the currency continue a downward trajectory or will it bounce back?

Zika virus: The mosquito-borne virus has been linked to thousands of cases of infant birth defects, and is set to spread in Brazil and beyond during the Southern Hemisphere summer. The CDC could issue a warning urging pregnant women not to visit Brazil and other Latin American countries where the virus is active.

Rio security: The Olympics will mean the city goes into mega-event mode, which usually means it is temporarily safer. In the aftermath of Paris, there will also be more high-level security measures in place to address terrorism concerns. The controversial pacification process is ongoing, and it's worth keeping an eye on police brutality cases in favelas, particularly "pacified" ones.

What other issues are you keeping an eye on this year?

Image: Congress, Brasilia. Credit: Senado Federal.

What's Ahead for Brazil in 2014

While 2013 has been an incredibly interesting year for Brazil, 2014 promises to be even more fascinating. Beyond the World Cup, which promises to occupy much of the year's headlines, here are some of the big issues to watch.

Transportation fare increases: Governments throughout Brazil backed down on raising bus and subway fares in 2013 after those increases helped spur some of the largest protests seen since redemocratization. Nevertheless, a fare increase could be coming in Rio as early as January.

Inflation and cost of living: In 2013, food prices rose over 9 percent and were the major cause of inflation this year. Overall, inflation this year is estimated at under 6 percent, while some estimates put next year's inflation at a little over 6 percent. São Paulo and Rio in particular continue to see a rising cost of living.

Consumer debt: With more Brazilians gaining access to the banking system and credit, consumer debt has been a growing problem to keep an eye on. Over the past 12 months, the number of Brazilian families in debt has fluctuated between 60 and 65 percent. Around 20 percent of Brazilians are behind on their bills. Over three-quarters of Brazilians in debt point to credit cards as the source of their debt; credit card interest rates in Brazil continue to be sky-high, reaching up to 500 percent a year.

Security: While in the past decade, the overall trend for homicides has been an increase in the Northeast and a drop in the Southeast, crimes like robberies and muggings are rising in cities like Rio and São Paulo. Rio in particular has faced problems with crime this year after a period of seeming improvements.

Pacification in Rio: Though initial results were promising, this year has seen some cracks in Rio's pacification strategy, such as outbreaks of violence in pacified favelas and revelations of police abuses, the most serious being the torture and murder of favela residents. One of the most important things revealed this year are statistics showing disappearances in pacified favelas rising as murders fall. We'll see what happens with this trend next year. Fundamentally, the biggest problem with the strategy is the police force itself, as some police have traditionally been criminals themselves, either working directly with drug traffickers or operating in militias when off-duty. Without a major police reform, the strategy could see similar challenges next year.

Health and education policies: One of the major complaints of protesters this year was that the government is investing in the World Cup but not enough in hospitals and schools. In 2013, the government began importing Cuban doctors in a bid to bring medical services to underserved areas, which initially was met with controversy that has petered out a bit. Much more remains to be done though, so next year it will be interesting to see how the program goes. There were also big teachers' strikes this year which could potentially happen again in 2014.

Corruption scandals: One of the most important things that happened in 2013 was when a group of defendants in the country's biggest corruption case went to jail. Parts of the trial are going to drag on next year as some defendants get appeals, but a new corruption scandal would feed another one of the protesters' complaints.

Protests: While it seems likely that there will be some demonstrations around the World Cup, it remains to be seen whether there will be a repeat of the 2013 protests. That will depend on all of the factors above.

Elections: Brazil will hold presidential and legislative elections in October, which means that federal policies will potentially be designed to appease voters as Dilma seeks reelection. It may not be a year to experiment with reforms or to raise taxes, but it could be a year of bread and circuses.

Infrastructure: While a lot of focus will be on finishing stadiums in time for the games, it remains to be seen how many transportation infrastructure projects, ranging from new highways to airport renovations, will be completed before June. In addition, it will be important to see which major infrastructure projects are moving in an election year, like the Belo Monte dam or the São Francisco water project.

 

Brazil's Economy and the World Cup

Yesterday marked a year until the World Cup begins, while the Confederation Cup kicks off on Saturday. So from here on out, it's "will-Brazil-be-ready," imagina na Copa, on full blast. But the most interesting story to watch long-term in Brazil is quite another, though the mega-events do play a role.

The image of Brazil's booming economy has been slowly eroding, and not just in the international media. The promise of sweet-talking politicians and the illusion that everything is fine seem less likely to outsiders; in the past few years, I've lost count of how many officials and politicians I've heard painting the same rosy, though not entirely accurate picture. But for Brazilians, too, confidence has been falling and they're spending less. It's not just slower growth, or delays in infrastructure projects. It's also creeping inflation, the possibility of stagflation, and a gradual rise in consumer debt along with higher costs of living. Unemployment, which has been at historic lows, has been increasing slightly.

In Brazil for the last few years, perception and hype have been an important part of Brazil's economic story. Inflation has been one of the big drivers of revealing a reality the government has been eager to downplay. The massive sums of money the government is spending could be coming under closer scrutiny. 

This month, protests broke out in São Paulo and Rio, as well as Goiânia, Natal, and Florianópolis, over a rise in bus fares. It's not only a sign of growing discontent with the increasing cost of living, but also a reaction to a lack of a convincing policy response to growing inflation. As El País pointed out: "Not even in the face of big political corruption scandals did people [protest] in the streets. Once again, what's happening here is the famous quote attributed to Bill Clinton: 'It's the economy, stupid.'" While it's not true that Brazilians haven't protested corruption scandals, the manifestations are another sign that the cracks are beginning to show in public perceptions of the economy.

Also, the idea that an improved economy would bring down crime levels is one that has yet to be seen, especially in the country's two biggest cities. Ahead of the mega-events, Brazil launched its biggest border security operation ever, bought anti-aircraft tanks, and plans to fly drones over stadiums in Rio and Brasília. But the head of Abin, Brazil's intelligence agency, said last month that regular crime is a bigger concern than terrorism during the mega-events. Certainly, for Brazilians on a day-to-day basis, that's the case. In Rio state, murders, muggings, and car thefts all rose in April compared to the previous year. In São Paulo, robberies followed by murder increased 74 percent during the first four months of 2012; crime and insecurity are hot topics in the city.

So now the big games are coming, a time for the government to continue promoting this vision of a booming Brazil. But with much of the infrastructure for the mega-events funded by the government, some Brazilians may cast a critical eye on the investments being made. The cost of stadium construction and renovations alone stands at $3.3 billion, and could go up more. Could these same stadiums remain as a symbol of the golden days of the boom and misguided public spending? Economist Luciano Sobral, also known as the Drunkeynesian, thinks so.

"Evidently, it won't only be the 'arenas' that will have screwed the country, but I see them as the main symbols of a combination of arrogance, exaggerated optimism, poor planning, and swindling that are bringing Brazil down," he wrote. "The decision to put money (much of it public) into football stadiums will be seen as the sign marking the height of a cycle in which Brazil imagined itself to be on an inevitable path to becoming a rich country, only to realize a few years later that we'd had little more than luck to produce, for a time, what the Chinese wanted to buy in large quantities." He ends on an even more pessimistic note. "In the future, when I walk through the ruins of those arenas with my future grandchildren, I'll use the stadiums to tell...the story of how during my generation, Brazil screwed itself over."

I'm a bit more hopeful. I'd like to think that the bus fare protests are actually a good sign--that people are more invested in accountability. It's a little too late to cut the costs of the already overbudgeted stadium projects, but with an election year ahead, it remains to be seen if bread and circuses will win out.

 

Q&A with the Drunkeynesian: Brazil's Food Inflation

Earlier this month, I reported on Brazil's tomato crisis, with prices of tomatoes and other vegetables rising. Soon after, the international press also began covering this issue (see Beyond Brics, FT, Bloomberg, AP, NPR, and Quartz). There were even reports in the Brazilian press of tomato smuggling across the Argentine border. One of Brazil's most popular TV personalities, Ana Maria Braga, wore a "tomato necklace" on TV and joked she was wearing gold. This weekend, two of Brazil's largest weekly magazines put tomatoes on the front cover. Much of the coverage, both domestic and international, focuses on the threat of inflation, and what rising inflation could mean for next year's presidential election. There's also the issue of consumption. Valor reported last week that due to rising food prices, supermarket sales fell 2.1 percent in February, though families spent 9.3 percent more than in February 2012. In the last week or so, tomato prices have started to go down, though prices of other vegetables--namely onions and potatoes--increased by 15 and 25 percent, respectively. Onions, too, are being smuggled across the Argentine and Paraguayan borders.

To determine what is really going on with food inflation, I talked to São Paulo-based economist Luciano Sobral, also known as the Drunkeynesian, to get his views on whether this a long-term trend, a short-term problem, or a symptom of other economic forces at play.

Tomatoes, onions, and other vegetables and food products have risen over the last year. There are climatic reasons (drought, rains) and agricultural reasons (less area planted), but what are the bigger economic forces at play?

I don’t think there are other bigger economic forces acting here, since demand for those items is pretty much stable. As you mentioned, there was a supply shock caused mainly by climatic reasons (heavy rains in the Southeast, a severe drought in the Northeast), and since arbitrage is not possible for several products (there’s no international market, at least not a liquid one where players can hedge or speculate), prices skyrocketed. Curiously, the prices of exchange listed agricultural commodities have been falling consistently since last September, so if there’s any external factor in foodstuff items it should lead to lower domestic prices.

How is food inflation going to affect inflation overall? The economy overall?

Of course the first effect is a spike in headline inflation. The infamous tomato story caused a frenzy on local media (two of the largest weekly magazines in Brazil are currently running cover stories about inflation and food prices), and called attention to a deeper, more structural problem: headline inflation is so sensitive to food prices because ex-food inflation has been quite high. Service prices are rising more than 10 percent per year. There’s a huge adjustment in relative prices going on, and it’s not favourable to capital or investments. Thus the conundrum: the current situation is very desirable politically (low unemployment and real wages rising), but it doesn’t seem sustainable, since overall profit margins look already quite weak and don’t attract new private investments. Dilma has the political incentives to postpone an adjustment until after next year’s elections, but, as a long term growth strategy, Brazil cannot rely only on state-lead, profit-insensitive capital investment.

Do you think food-driven inflation will continue into next year? Or is this a short-term issue?

I don’t see a major global uptrend in food prices, so I’d bet this is a short-term issue. Shocks related to climate are pretty much random, impossible to forecast. What’s been more or less established is that they tend to dissipate quite quickly, as soon as the climate turns favorable or higher prices attract new producers or importers to the market. An example: tomato prices hit R$12/kg a couple of weeks ago; this weekend I bought beautiful tomatoes at a supermarket for less than R$4/kg.

What does the price spike of certain foods reveal about the Brazilian economy?

Despite all the progress of recent years, Brazil remains a (somewhat) poor and (very) unequal country. The substantial weight of food prices in the average consumption basket (and, consequently, in price indexes) is an evidence of that: everytime certain food prices rise, there’s a national concern. This is similar to what happens with tortilla prices in Mexico or rice prices in some poor Asian nations. Another interesting aspect is the dependence of Brazilian food markets on local producers, since importing is not a viable emergency solution (think of taxes, red tape, complicated logistics). This tends to make supply shocks more frequent and persistent. Finally, it shows the old obsession of the country with inflation, as if it were part of our collective conscience, and how there’s little space in current inflation to accommodate shocks within the established inflation target range (2.5 percent to 6.5 percent, with a center of 4.5 percent). Brazil indeed has an inflation problem, although I don’t think it’s as dramatic as the media and some economists are painting it; only it serves as an important alert to more complicated structural issues.

Image: Courtesy of Drunkeynesian

Brazil's Tomato War

Brazil has a tomato problem. In recent weeks, the price of tomatoes has skyrocketed, making it as expensive as meat and chicken in some cases.

In supermarkets in parts of São Paulo state, Brazil's second-largest tomato producer, the price of tomatoes rose by 346 percent, from R$1.90 to R$8.49 per kilo. Wholesale prices there have also risen above 330 percent. In states like Mato Grosso do Sul and Pernambuco, prices spiked above 200 percent. In Goiás, the country's largest tomato producer, tomato prices hit an all-time high of 150 percent in April.

Nationwide, tomato prices increased 17 percent in the last week alone. Prices went up 70 percent from January to March, and rose a total of 150 percent in the last 12 months.

For an international comparison: At my local grocery store in New York, vine tomatoes are on sale for $1.97 per pound, or about R$8.61 per kilo. In São Paulo, vine tomatoes at Pão de Açucar are selling for R$14.39 per kilo--67 percent more than in New York. Even in Alaska, tomatoes cost less than in some Brazilian cities.

A number of factors are at play. Areas of tomato cultivation were reduced nationwide, in part due to heavy rains in the South and a record drought in the Northeast. There was also overproduction of tomatoes last year, which led to fewer areas of cultivation this year. In total, the area covered by tomato fields fell 16 percent in Brazil; in Goiás, by nearly 42 percent. The result of falling supply? Higher prices.

On the agricultural side, there were other factors. Some crops were hit by diseases. Agricultural labor doesn't come cheap. Small-scale farmers are often unable to invest in high-tech equipment, opting to pay for workers instead. Another theory is that the lack of policies to guarantee a minimum price based on production costs has also had an influence. Then there are the overall economic causes. High production costs, as well as high price of diesel, contribute. There's also the "Brazil cost," which includes expensive transportation costs and high taxes. 

The price spike has led to jokes in the media and on the internet, spawning political cartoons such as a robber demanding tomatoes instead of a wallet, and a woman complaining that tomatoes are too expensive to throw at politicians. It's inspired Facebook memes, showing TV host Silvio Santos giving away tomatoes as a prize, an engagement ring made with tomatoes, and an image of a robber saying: "ATMs are over with. The game's in boxes of tomatoes now."

Some people are simply cutting back on tomato purchases. But others, like an Italian restaurant in São Paulo is fighting back and "declaring war" on tomatoes. Nello's Cantina and Pizzaria announced on Facebook earlier this week that it would stop buying tomatoes and serving dishes using tomatoes until the price goes down--a fairly extreme decision for an Italian restaurant. Today, though, the restaurant posted a video showing owners negotiating 25 boxes of tomatoes at a wholesale market. (Incidentally, this is the same restaurant that, like several other upscale restaurants in São Paulo in recent memory, saw armed thieves invade the premises and rob 60 customers about a year ago.)

Some say prices will come down soon, though it's not likely to come down to previous lows. Other vegetables, like onions and carrots, have also become more expensive, hitting the highest prices in 14 years. Is this just a price flux? Or is this a sign of more inflation to come--which could have a bigger impact ahead of next year's election? We'll have to see. For now, Brazilians may just have to cut back on salad.

**Updated 4/6 with additional info on Alaska prices, corrected tomato cost per real in NYC.

Favela Consumers: The Invisible Market?

With the expansion of Brazil's middle class, something has become increasingly clear: favelas are home to a vast and growing number of consumers. Though this was apparent to companies like Coca Cola and Nestlé over a decade ago, the purchasing power of favela residents has risen due to a jump in salaries, a decrease in unemployment, and greater access to education.

Brazil's so-called "C class" grew by 50 percent in urban favelas over the last decade, according to a new Data Popular study. Now, around 65 percent of favela residents are considered middle class, versus 37 percent in 2002. Brazilian favela residents--around 12 million people--earn around $28.4 billion a year, the equivalent of Bolivia's GDP. "This used to be an invisible market, because it was right under our noses," says Data Popular Director Renato Meireilles, "but people only saw favelas through the perspective of violence and drug trafficking."

Over the last ten years, access to goods for favela residents has exploded. The number of those with washing machines doubled to over 50 percent. Nearly 90 percent have cell phones, and 40 percent have computers. Around 45 percent are regular internet users. While most daily purchases are made within favelas, larger purchases, like electronics, are made in stores outside the community. About 70 percent of favela residents go to the mall every week, and 50 percent eat out on a weekly basis. Around half said they plan to buy furniture within the next year, and 36 percent plan to buy home appliances.

Some companies have taken note. Casas Bahia, one of the country's largest retailers, opened a store in Rio's Rocinha in November. On opening day, the store sold 10 times as much as the average store, and the chain plans to open a third favela location in 2013. Vai Voando, an airfare vendor, has 70 stores in favelas alone, largely in Rio and São Paulo. The company counts around 3,000 passengers a month, with 43,000 customers since the company started two years ago. The company's owner, Tomas Rabe, plans to open 50 more stores this year.

Now, plans are underway to build Rio's first favela mall, in the "pacified" Complexo do Alemão. The $10 million investment aims to open 500 stores, at least 60 percent of which will be run by local favela residents. All maintenance, security, and janitorial work will also be done by locals in order to create jobs, especially for youth. A branch of Caixa Econômica bank will offer microcredits for small businesses within the mall itself. The mall also plans to house local street vendors. The project is due for completion later this year. Elias Tergilene, a former street vendor who runs a series of malls, is behind the initiative. He hopes to invest $253 million over two years in favela malls, aiming to open similar shopping centers in São Paulo and Belo Horizonte.

However, not everyone is happy about the new favela consumers, who along with buying computers and washing machines are also frequenting some of the same public spaces once reserved for the wealthy. "The C class put an end to the exclusivity of the A class in that the new middle class began to consume products and services that it didn't buy before," Meireilles told me in November. His company found that around 50 percent of upper class consumers only want to be around people from their social class, and over half believe that products should come in different versions for the rich and the poor.

A salient example of this recently emerged in Rio. A new beach club in Copacabana opened, offering a private strip of sand on one of the city's public beaches. For an entrance fee of between $45 and $126, beachgoers can get into the exclusive club--where safety and a clear separation from so-called favelados (favela residents) are considered selling points. "I stopped going to Ipanema and started coming here every day because it's a much more select crowd," sociologist Camilia Diniz told VEJA. "I can drink champagne out of a glass and brush my hair afer swimming." The manager of the beach club noted: "Everyone can come here without being afraid of wearing a Rolex or bringing a Louis Vuitton bag."

Image: Rocinha favela in Rio, Memorias do PAC.

Brazil In The Year Ahead

The big story making headlines as we get closer to 2013 is that of Brazil's slowing economy. While that will continue to be an ongoing issue to watch, here are a number of other things to keep your eye on in the year ahead.

Issues to Watch: Brazil

• Oil and gas. With the first oil concessions in five years due to take place in 2013, this is the industry to watch next year. But the ongoing royalties fight in Brasilia isn't over yet, and the royalties law could end up in the Supreme Court again if Congress overturns Dilma's partial veto.
• Brazil's new middle class. As one of the most compelling tales of Brazil's growth, this group is the one to watch--especially to see if it can be sustained or grow amid sluggish GDP growth and rising consumer debt.
• Airport and port privatizations. Travelers eagerly await airport upgrades; businesses hope for more efficient ports. The process could be long, but there should be movement in this area next year, especially after the recent announcement that Rio and Belo Horizonte's international airports will also be privatized.
• Construction and housing. In spite of slower growth, this is an area that continues to chug along. FipeZap estimated that real estate prices rose by nearly 14 percent this year and doubled within the last 3 years. The government also hopes to use this sector to boost growth, and the subsidized housing program Minha Casa, Minha Vida is full speed ahead.
• BNDES. Brazil's development bank lent nearly $60 billion through November of this year and could lend up to $73 billion by the end of 2012. Keep an eye on where BNDES is spending, particularly the Brazilian multinationals and major domestic projects, like the controversial Belo Monte hydroelectric plant.
• Government corruption. Will the mensalão defendants actually go to jail? Will Dilma continue to show no mercy for those accused of wrongdoing? Will new transparency laws help uncover new scandals?

Issues to Watch: Rio

• UPPs. Violence has flared up in several of the city's "pacified" favelas, and most of the on-duty military police that died this year died in UPP favelas. Keep an eye on how current UPP favelas are faring in terms of security, as well as plans for new UPPs in other favelas.
• Transportation construction. The bus rapid transit system is underway and operating in a section of the city, with four new stations inaugurated last week. Four more stations are due to open in January with ongoing construction throughout the city. But getting the system online isn't the only challenge; people keep getting hit and killed by the BRT and many have complained about overcrowding. Expanding Rio's metro system is also underway with a price tag of $3.6 billion.
• Militias. The government has focused much of its security strategy on combatting drug traffickers and bringing a permanent police presence to favelas. Will it finally turn the heat up on the city's paramilitary groups?
• Favela removals. Forced evictions from favelas to make way for mega-event construction and urban renewal have stirred controversy on an international scale. Keep an eye out for how these removals play out.
• Mega-event preparations. From stadium construction to training programs, this is an ongoing area to watch. Maracanã Stadium renovations are due to conclude by the end of February, likely over budget. Maracanã is also due to be privatized next year, so keep an eye out for who wins the prize.

People to Watch

• Guido Mantega: Will he hang on as finance minister? If an Economist article won't be his downfall, could more disappointing growth numbers be the final straw? Or will he stay on until the bitter end?
• Joaquim Barbosa: The new president of the Supreme Court became something of a national hero for his hard-line approach during the mensalão trial. But he also decided against immediate imprisonment for those convicted in the trial. Beyond the mensalão, keep an eye on Barbosa and major STF trials next year.
• Lula: The heat recently turned up again from mensalão accusations, though it seems likely he'll remain unscathed for now. But with presidential elections in 2014, will he decide to become a candidate or let Dilma run for reelection?
• Eduardo Campos: The governor of Pernambuco looks like a likely presidential candidate in 2014. Watch for campaign announcements next year.
• Marco Antonio Raupp: Brazil's minister of science, technology, and innovation could be the spokesperson for some of the government's most interesting new initiatives. In November, he announced the launch of Start-Up Brasil, a $40 million project aimed at Brazilian startup companies.

People to Follow

• Brazil's economy - Luciano Sobral, the Drunkeynesian
• Brazil's new middle class - Renato Meirelles of Data Popular
• Brazil tech news and startups - TNW's Anna Heim
• Government transparency - Observing Brazil's Greg Michener
• Everything Rio - RioReal Blog's Julia Michaels
• Rio mega-event preparations, favela removals - Christopher Gaffney of Hunting White Elephants