As Brazil sneezes, are we catching a cold?

Buenos Aires Herald. 23 de mayo de 2016.

Like it or not, Argentina’s fate has always been closely linked to that of its main strategic partner, Brazil, both as our country’s biggest commercial counterpart as well as the main regional headlight toward the rest of the world. Against luck, news arriving from our northern neighbor aren’t encouraging at all.

To dwell on the idea, we have to contextualize it in economic and political terms first. To start with, Brazil gross domestic product is around 2.25 trillion dollars (2,250 billion or between 4 and 5 times Argentina’s GDP). However, it has been suffering a contraction at the fastest pace in the last 100 years. Since it peaked in 2013, Brazil economy shrank around 7%. For the last year, government’s budget deficit amounted more than 10% (in fiscal terms, which include interest payments) while the primary budget deficit stood at around 2%. Its currency has depreciated more than 76% since the outburst of the current economic and political crisis, surpassing the 4 real per dollar mark at a given point during last summer. The Bovespa Index, Brazil’s most representative stock barometer, is down more than 50%, when measured in US dollars. The unemployment rate stands at 11%, while core inflation is around 8% -the highest for the last decade-. This is just a brief outlook of the state of the economy.

Moving towards the political arena, after many comings and goings, Dilma Rousseff had her presidential powers suspended for 180 days. This was pushed forward by the Senate on May 12th, as a logical consequence of awaiting the outcome of her impeachment trial. Reasons can be found in tax evasion cases, with the epicenter in Petrobras’ scandal. Michel Temer, Dilma’s vice president, assumed the role of Acting President. Despite representing the Brazilian Democratic Movement Party (PMDB) in the coalition government formed with the Workers’ Party (PT) for 2014 elections, he has turned out to be one of Dilma’s fiercest political opponents in recent times. Both political survivorship and the current state of affairs warranted such behavior. Nevertheless, it’s not certain whether Temer will be able to hold onto power, nor that Brazil’s grieving will cease during his tenure.

In Temer’s case, traces of the ongoing corruption scandals might came back to haunt him too. If so, the outcome would be an early call for presidential elections, extending political turnmoil. Most probable, the agony will continue to take a toll on economic agents’ confidence and the economic development altogether. Just a small glimpse of certainty and willingness from political leaders pushed markets up sharply in the past two months.

All said, the focus can now be shifted towards the impact on Argentina. In terms of trade, the impact is already being felt. Our neighbor, in dollar terms, receives approximately 18% of ours goods and services, while accounting for 21.7% of our imports. Exports are down almost 27.5% in 2015 and 42% since the infamous “cepo” was establish in 2011. The ratio imports-to-exports stands still at 1.3 during the period, while the commercial imbalance (in favor of Brazil) remains mostly unchanged. A conservative guess is that, given the ongoing crisis, it will push forward its imports while not being able to assure a receptive environment for our products. Some sectors of the economy will suffer it the most, as they have been shaped with an eye set on this rising market. For example, the cars manufacturers are at the crossroads between scaling down and finding new customers (markets) to place their surplus production. Unions, still over-empowered by the last administration, are unwilling to recognize the new reality, making resource reallocation more slowly and painful. In that scenario, Argentina’s main bet is on a swiftly recovery for internal markets, as well as a flood of foreign direct investments –given it’s laggard situation compared to other countries in the region-.