Brazil: Lula Edges Away From The Presidency, But Is He Nearer Prison?

Last Updated: 21 February 2018
Article by Veirano E Advogados Associados
Most Read Contributor in Brazil, October 2018

Three judges at the appeals court in Porto Alegre put a spoke in the wheels of a juggernaut campaign bus on 24 January when they voted unanimously to uphold the sentence that a lower court had handed Luiz Inácio Lula da Silva. Brazil's former two-term president, always known as Lula, is by far its most popular candidate for this year's presidential race.

The judges also increased his sentence from nine years and six months to 12 years and one month, though Lula has not yet served any time behind bars. The ruling sparked protest across the country, and angry supporters set fire to tires and blocked streets in Porto Alegre and São Paulo.

 Although Lula's conviction on corruption charges may well bar him from the 7 October election, a Datafolha poll published on 31 January has him leading the field with 34 percent of the vote if he is allowed to run. Far right congressman Jair Bolsonaro comes in a distant second with 16 percent, followed by environmentalist Marina Silva with 8 percent.

Lula would also be likely to win if the vote goes to a second-round runoff, as would be required if no candidate wins a majority in the first round.

But what if he is struck from the ballot? His ability to transfer his support to other candidates appears quite Silva instead, and 14 percent would back Ciro Gomes, the leftist governor of Ceará state. A staggering 32 percent of respondents that they would abstain from voting altogether if Lula were barred.

At the same time, some 53 percent of those surveyed said they believed Lula should be jailed, and asserted that they would never vote for any candidate whom he backed.

That leaves the political and judicial powers that be in a quandary. A substantial proportion of Brazilians have made it clear that their distaste for the current slate of politicians, seen largely as corrupt and self-interested, outweighs their distaste for Lula, who is seen by many as corrupt but fundamentally on the side of citizens. And another, even larger proportion have indicated that they are not willing to overlook his malfeasance.

When Lula became president in 2003, he promised an end to corruption-ridden politics. Then, in 2005, a huge vote- buying scandal known as mensalão threatened to unseat him, but he allocated billions of dollars to social programs and left office in 2011 with soaring approval ratings.

Confidence in the leftist former president is not shared by the business community. The benchmark Bovespa stock index broke a record and the Brazilian currency surged on the news that his conviction had been upheld.

Lula's support, which is especially strong among the poor, is nonetheless explicable when one considers that a quarter of the Brazilian population still lived in extreme poverty in 2016, according to World Bank criteria. The picture is bleaker among single women of color with children up to 14 years of age. Some 64 percent of such households had a per capita household income of R$387 (US$120) per month. Income inequality is also a significant and growing problem.

There is not a little irony, then, in the fact that this champion of the poor was convicted in July 2017 of accepting a deluxe seaside apartment as part of the massive bribery scheme that funneled money through the state-owned oil company Petrobras. Lula was originally sentenced in July by Judge Sérgio Moro, who has made a name for himself as an anti-corruption crusader with a penchant for tough sentencing.

Lula also faces charges of money laundering, influence peddling, and obstruction of justice, all of which he denies. But even if his conviction is upheld after he has exhausted the appeals process, it is uncertain he will do jail time. With innumerable politicians also under investigation and liable to be convicted, the ramifications of one of their own actually serving a prison term are enormous. Speculation has it that the political/judicial powers will therefore do everything possible to avoid this outcome.

With the latest ruling, Lula is nonetheless legally ineligible to stand for office – the Clean Record Law (Ficha Limpa) prohibits candidates with criminal convictions – but he plans to appeal all the way to the Supreme Federal Court (STF). The Workers' Party has indicated that he will register his candidacy on 15 August.

With a final decision by the electoral courts unlikely to be handed down before mid-September, that will buy him some campaigning time. But the prospect of a third presidential term is growing dimmer.

INFRASTRUCTURE ISSUES

A boost for the northeast

The National Bank for Economic and Social Development (BNDES) increased its financing of infrastructure projects in the northeast by 24 percent in 2017 compared to 2016, according to the press office of the presidency. With US$4.4 billion disbursed, the region received 20 percent of all credit offered by the bank. The funding went to projects that created more than 235,000 jobs.

Giant water project moves forward

The São Francisco River Integration Project is a landmark infrastructure development that will benefit millions of Brazilians in the northeast. The East Axis was inaugurated in March last year, and on 2 February President Michel Temer inaugurated the second pumping station of the North Axis, located in Cabrobó, Pernambuco.

Minas Gerais state. The planned expansion will boost output capacity by about 56 percent and allow the mine to operate for another 15 years.

Pará produces iron

Led by increased iron ore extraction, industrial output in Pará expanded 10.7 percent over the past year, according to Brazilian Institute of Geography and Statistics (IBGE) data. That result puts Pará second only to Goiás state. Extraction of crude or processed iron ore represents about 77 percent of industrial activity in Pará. The boost in output has been caused by rebounding exports.

BANKING & FINANCE

Bank profits

The Brazilian economy is slowly improving, but bank profits are improving much more quickly. The combined profit of Banco do Brasil, Bradesco, Itaú, Unibanco, and Santander Brazil is likely to show a 19 percent increase in 2017Q4 over the same quarter a year earlier, according to The North Axis project is now 95 percent complete. This new 140 km section will bring water to Jati, a municipality in Ceará. It is expected to be completed by June, after receiving more than US$0.43 billion in investment. Under the Time to Move Forward program, an initiative to restart stalled infrastructure development, more than 7,000 projects have resumed throughout the country.

Anglo American gets licenses

In the last week of January, mining giant Anglo American finally received environmental licenses that will permit the global company to expand its Minas-Rio mine in financial analysts and as reported in International Valor.

Equities plunge

As US wage growth figures keep rising, investors took flight at the beginning of February amid questions about the pace of interest rate increases. Where did Brazil stand in the resulting free fall in the global equity market? Brazilian equities were among the worst hit, down 6.4 percent – slightly more than the S&P 500, which lost just over 6 percent.

Central Bank cuts rate

The Brazilian Central Bank dropped its benchmark Selic interest rate on 7 February, from 7 percent to 6.75 per- cent. This represents a record low and Copom, as the monetary policy committee is known, signaled that it would not cut the rate further at the next meeting. This is the 11th cut in as many meetings.

The policy statement indicated that despite global volatility, the outlook remains good for emerging economies. The Brazilian economy continues to improve, but the bank reiterated its concern that failure to pass the government's pension reform proposal could cause the recovery to falter.

Inflation news

High unemployment is keeping inflation low, as food

price deflation keeps the rate below the bottom end of the Central Bank's target band of 4.5 percent plus/minus 1.5 percent.

Core inflation, which does not take volatile items such as food prices into account, is at an estimated 3.5 percent, but Brazilian Institute of Geography and Statistics (IBGE) data put cumulative inflation for 2017 at 2.95 percent, compared to 6.29 percent in 2016. Year-on-year prices rose most in the housing and transportation sectors: 6.26 percent and 4.1 percent, respectively, while food prices registered –1.87 percent.

State banks rein in lending

Brazilian Central Bank data reveal that government-owned banks cut their lending by 7 percent from the beginning of 2016, to a total US$525 billion in December 2017. The banks' market share of total credit went from 56 to 54 percent over the same period, according to Bloomberg.

ECONOMY IN BRIEF

Sticking to the golden rule?

Under the 1988 Constitution, Brazilian governments can increase indebtedness only in order to invest in public works or equipment or to refinance public debt. The so- called golden rule stipulates that operating expenditures such as public-sector wages, services, and expenses cannot be financed by adding to the debt through bonds or other means.

For 2018, the government can count on the repayment of US$41 billion lent to the National Bank for Economic and Social Development (BNDES) by the National Treasury and on increased revenues, but Planning Minister Dyogo Oliveira announced on 30 January that the 2019 budget proposal cannot uphold the golden rule. The ministry's budget team is studying ways to address a gap of US$46.3–61.8 billion expected for 2019.

The minister noted that the proposed pension system reform would solve the problem permanently, since a considerable part of the fiscal deficit goes to public-sector pensions.

Industrial output rising

Industrial output ended 2017 on a positive note, as an increase of 2.5 percent over 2016 produced the first annual positive result since 2013, according to Brazilian Institute of Geography and Statistics (IBGE) data. The automotive sec- tor led the way, rising 17.2 percent over the previous year. (It continued that boom with a rise of 23 percent in the first month of 2018 compared to January 2017.)

All major categories recorded increases on the cumulative Monthly Survey of Physical Production (PIM-PF) for the year. Durable goods rose 13.3 percent, capital goods 6.0 percent, intermediate goods 1.6 percent, and semi- durable and non-durable consumer goods 0.9 percent.

Food prices falling

Bumper crops of soybeans, sugarcane, and rice helped push food prices down by 7.29 percent on the Producer Price Index (IPP) for 2017. The food sector has the greatest weight in the index, and it is hoped that the trend will continue in 2018. December rainfall helped to improve harvest forecasts for this year, from 219.5 million tonnes to 224.3 million tonnes.

BUSINESS NEWS

Confidence returning

The Getúlio Vargas Foundation Business Confidence (ICE) Index rose 1.5 points in January to 94.9 points. The index consolidates the individual confidence indexes calculated for the services, trade and construction, and industrial sectors.

The services sector rose 1.2 points, construction 0.2 points, trade 0.1 points, while confidence in industry was stable. Some 4,946 companies were surveyed through- out January.

Boeing woos Embraer

With European rival Airbus having formed a partnership with Canadian company Bombardier last year, US aircraft manufacturer Boeing is seeking a deal with Embraer, as reported in the New York Times.

The US and Brazilian companies have little overlap in their production lines, and Boeing would like to expand its portfolio – as well as to gain access to Embraer's aeronautical engineering expertise.

Embraer in turn would benefit from the synergies of a Boeing partnership, but the Brazilian government, which has power of veto over any change of ownership in the company, is clear that a takeover is out of the question.

Embraer is a national emblem of success, and any new business arrangement will have to take sensitivities about sovereignty into account. As well, the Brazilian government is seeking to reassure Saab, which is a partner in the development of the Gripen NG fighter with Embraer, that it will protect the confidentiality of Swedish technology transfer.

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