Global Insight Perspective

Significance

The allegations made by the PTB president are a clear indication that he is unwilling to become a scapegoat in the probe into corruption at the state post office, but the allegations will at the same time increase pressure for the probe to go ahead and for its possible extension to other state enterprises.

Implications

Jefferson's attack raises further doubts about the unity of the loose governing coalition and increases the risk of the PTB being forced to leave.

Outlook

Although expectations were low of the government's ability, in a pre-election year, to build a political consensus on more controversial votes such as the harmonisation of state ICMS tax, central bank autonomy or far-reaching political reform, the latest allegations and the setting-up of one or more probes could lead to slow voting on other issues that are also important for investor confidence. 

PTB President Launches Attack Against Government

The president of the Brazilian Labour Party (PTB), deputy Roberto Jefferson, mounted a fierce attack against the ruling Worker's Party (PT) in an interview with Folha de São Paulo published yesterday, in which he accused PT treasurer Delúbio Soares of paying out 30,000 reais (US$10,000) in bribes per month to secure the support of its allies, the Brazilian Progressive Party (PP) and Liberal Party (PL), but claimed that his party refused to take any money. Jefferson alleged that the practice had been going on since 2003 and only stopped in January after he informed President Lula about it. 

The PT issued a statement signed by party president José Genoino denying the allegations, and President Lula called a cabinet meeting to discuss the issue.

The Other Corruption Scandals

Jefferson's attack on the ruling PT comes days after the government failed to persuade enough legislators to withdraw their signatures from an opposition-sponsored petition to create a bi-cameral investigation (CPI) into allegations of corruption at the state post office. The post-office scandal emerged following the publication of a report by the weekly magazine Veja, which claimed to have a videotape showing a post office official, Mauricio Marinho, accepting bribes from companies in return for supply contracts with the post office. Marinho claimed to have Jefferson's backing. The PTB heads the post office and is allied to the loose governing coalition. Amongst those that voted against the government were 14 PT deputies and one senator. Last month, the Supreme Federal Court also agreed to open separate investigations into the Minister for Social Security Romero Jucá of the Brazilian Democratic Movement Party (PMDB) and the president of the central bank Henrique Meirelles.

Financial Markets in Brazil Sink Following Allegations Against PT

Developments in the political arena have had a strongly negative effect on local markets. The Bovespa stock index yesterday dropped 3.1% to close at 25,556 points, having been down more than 4.1% earlier in the session, while bonds and the currency also suffered. The benchmark 2040 global bond eased by almost 1.2%, while the real weakened by 1% to close at 2.45 reais (US$1). The financial markets fear that Lula could abandon the government's conservative fiscal policy and thus lose part or all of the improvement made over the last two years to the country's public finances and debt ratios. If such a scenario came to pass, which is not likely in Global Insight's view, at least in the short term, inflation and interest rates would likely increase in the medium term, while the economy could stagnate. The fact that presidential elections are scheduled for October 2006 can only add to the incentives for the current government to loosen policy, while the congressional gridlock that the affair will likely generate bodes poorly for the administration's structural reform programme.

Furthermore, the scandal comes at a time when confidence in the resilience of Brazilian growth is already beginning to wane. The central bank's latest weekly survey of private-sector analysts, published yesterday, pegs GDP growth over 2005 as a whole at 3.27%. This compares unfavourably with last week's projection of 3.50%, with the decline hardly unexpected given the publication of a weaker-than-expected GDP report for the first quarter. This showed growth slowing to 2.9% year-on-year from 4.9% in 2004 . A key factor behind the economic deceleration is the increase in interest rates implemented since September 2005. This has seen the key selic rate pushed up from 16.0% to 19.75%, and market watchers are now expecting it to end 2005 at 18.0%. On a more positive note, the central bank's austere policies are beginning to rein in inflation expectations. The official Ibge-Ipca index of consumer prices is now expected to rise by 6.32% over 2005, down from last week's projection of 6.35%, with an increase of 5.38% predicted over the next 12 months.

Head of Eletronorte Steps Down

Meanwhile, the first PTB official appointed to a state enterprise has stepped down following last week's opening of the post-office probe. Roberto Salmeron, the president of the federal power company Eletronorte, submitted a letter of resignation to Mines and Energy Minister Dilma Rousseff on 6 June, who accepted it. Although Salmeron's resignation follows Jefferson's comments that the PTB would hand back all of the posts awarded to it to the federal government, there have been allegations in the local press that the alleged bribes-for-contracts scam set up by the PTB at the post office might also have been practiced at other state enterprises run by the party, such as Eletronorte.

Outlook and Implications

Corruption has long been a feature of Brazilian politics. The most high-profile corruption scandal in recent times involved former president Fernando Collor de Mello, who resigned in order to avoid impeachment by Congress in 1992 for influence peddling. The PT has historically had a reputation for greater integrity than some of the other main parties, although last year's Waldomiro scandal showed that not even the PT is immune from corruption scandals.

The latest corruption scandals to have emerged in Brazil are an embarrassment to the government, which is to host a global forum on the fight against corruption between 7 and 10 June. Since neither the Supreme Court investigations nor the Congressional probe directly implicated a member of the PT, the government's popular-approval ratings have been dented, but the markets failed to react to the corruption scandals and news of the opening of the post office probe. However, the markets' response to the allegations against a leading member of the PT have been markedly different, serving as a reminder of Brazil's continued vulnerability to changes in market volatility.

The latest allegations will increase pressure for the probe into the post office to go ahead and for its possible extension to other state enterprises, threatening to further slow voting on the government's reform agenda. There is also a risk that if Jefferson's allegations are proved, this could negatively affect the government's popularity in a pre-election year.