How Brazil's Economic Recovery Got Run Off the Road: QuickTake

(Bloomberg) -- Just as Brazil’s recovery appeared to be taking hold, the country got bogged down. A 10-day strike by truckers over fuel pricing caused a crippling nationwide shutdown and was resolved only when President Michel Temer’s administration gave in to numerous demands, from cheaper fuel to a change in the leadership of the state-run oil company Petrobras. The cost: billions of reais in taxpayer money and a weakened government with a tarnished reputation for fiscal rigor.

1. Why was the strike so damaging?

It underscored how weak and unpopular the government is. Before Temer, the Brazilian government would intervene to cap the cost of fuel, hurting profits at Petrobras. Under Temer’s watch, Petrobras let the market dictate fuel prices, which helped the company but hurt Brazilian motorists when they filled their tanks. That’s what prompted truckers to block Brazil’s highways in protest. Temer’s responses -- slashing the cost of diesel and forcing out the widely respected Pedro Parente from Petrobras -- revealed a willingness to jettison fiscal discipline in return for political survival. A significant and vocal minority exploited the turmoil to call for military rule.

2. What does this mean for the economy?

Even before the strike, and its disruption to supply chains, economists had been steadily lowering their growth forecasts for 2018. (In the survey published on June 4, growth was expected to be 2.18 percent, more than a half-point lower than the outlook a month earlier.) Unemployment remains stubbornly high, around 13 percent, and investment has started to tail off as investors fret about this year’s wildly unpredictable elections. Now that the truckers have achieved virtually all their aims, the risk is that the government could face further strikes in other parts of the economy and further protests over fuel prices.

3. How might this affect the election?

The turmoil of recent weeks is likely to help extremist candidates and hobble centrist ones in national elections slated for October, which were already looking wildly unpredictable. Temer, who took office in 2016 after the impeachment of Dilma Rousseff, isn’t running; the leader in many polls is former President Luiz Inacio Lula da Silva, who is in jail and will likely be barred from running due to his corruption conviction. Jair Bolsonaro, the far-right ex-army captain currently polling second to Lula, offered strong supporter for the protesters and appears to be the main beneficiary. But leftists like Ciro Gomes may also gain from criticizing the government’s market-driven fuel-price policies. Reformist candidates associated with the Temer administration appear unlikely to make much headway with an angry electorate.

4. Could the Temer administration fall before the elections?

It’s unlikely, but possible. Ninety-six percent of Brazilians criticized Temer’s handling of the strike, and his approval ratings have long languished in single figures. For the third time in the past year, he’s under investigation for corruption, this time into allegations he received bribes in exchange for favoring contractors at maritime ports. New discoveries could lead the prosecutor to press charges once again. As his power ebbs away, his support in Congress is drying up, though he still appears to have the votes to avoid impeachment. Brazil’s political and economic elite want to reach the elections without further turmoil.

5. Could the military intervene?

That’s very unlikely. The growing calls for military intervention are mostly an expression of Brazilians’ frustration with their country’s democratic institutions after years of rising crime, recession and corruption scandals. The armed forces are also increasingly visible in public life. An army general was appointed in February to the defense ministry for the first time since the military dictatorship, and the Temer administration has deployed the armed forces frequently to help enforce public security in Rio de Janeiro. The military was also used to help break up blockades during the truckers’ strike. But senior military commanders have ruled out the possibility of an intervention.

The Reference Shelf

©2018 Bloomberg L.P.