Wash my car…

The “Lava Jato” (Car Wash) bribery and corruption saga continues to unfold in Brazil, with its impact and scope seemingly ever wider, giving the impression that corruption must be endemic throughout the Brazilian economy. Debate continues as to whether it is merely the largest corruption scandal in Brazilian history, or in the world.

The catalogue of politicians and business leaders who have been implicated or toppled from power is, indeed, extraordinary, with the current President at some risk of being impeached and removed from office because of his own alleged involvement in at least condoning bribery.

And all this has taken place against an economic background that has seen Brazil suffer its worst recession since the Great Depression. So Brazil must be an economic and political “basket case”, não?

Well, not so fast. The Brazil of today, with all its faults and issues, is not the hyperinflationary and autocratic state it once was, well within living memory.

Firstly, in spite of seemingly never-ending setbacks, the economy has begun to crawl its way out of recession in the last quarter, growing by 1% after 8 consecutive quarters of contraction, helped by a bumper soybean crop.

Secondly, the state’s government and governance structure has not collapsed. While the extent of political corruption may be astonishing, the judiciary has become relentless in investigating and punishing it; while those in power have not been able or effective in thwarting due process, even if some have tried. The previous President was impeached and her iconic predecessor, Lula, was himself unable to resist investigation for corruption.

Thirdly, in a world in which demand for protein in all its forms is rising inexorably, Brazilian agribusinesses produce what the world wants, even if they can fall victim to scandals over tainted meat, or the vagaries of commodities pricing.

Fourthly, the Federal Government has begun to reform the ridiculously expensive pensions system, and other areas of government expenditure. There are no certainties, but the fact that the attempt has been made in the face of political turmoil, recession, and a complex parliamentary ecosystem does show that there is room for some sense of “what needs to be done” to prevail.

Fifthly, Brazil is much less vulnerable than most to a currency crisis, as barely 2% of its sovereign debt is denominated in foreign currency.

Sixthly, the central bank is competent and appears free from political manipulation.

Of course, none of these factors means that the future is certain; but, as always, the negative weighs upon perceptions more than the positive, affecting judgements made and actions taken. We would never say that there is no risk in Brazilian exposure, but we do believe that one has to take into account all relevant factors to create an informed decision.

At Awbury, we are constantly monitoring, assessing and re-assessing the key political economies across the globe, looking for connections and correlations that could have an impact on the business we write, so that we can create effective mitigants that will minimize the risk of an unexpected outcome. It is all part of our obsession with effective risk management.

The Awbury Team

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