Joel Velasco on the Brazilian economy & business implications


Brazil Needs Jobs, Not Apologies

MAY 16, 2016 12:45 PM EDT

By Mac Margolis

Brazilians aren't easily impressed these days. A brutal economic recession and 26 straight months of the worst political corruption scandal in memory have seen to that. But on May 9, an unusual news item caught the public eye.  

That day, one of Brazil's biggest companies published an open letter to the nation. In the 770-word "Apology and a Manifesto for a Better Brazil,"  engineering and construction conglomerate Construtora Andrade Gutierrez SA asked the country's forgiveness for its role in a multibillion dollar kickback and contract fraud scheme at the state oil company Petrobras.

The contrition wasn't spontaneous. Sergio Moro, the federal judge who oversees the so-called Car Wash case on corruption at Petrobras, had ordered the contractor to come clean; the open letter -- along with a fine of about $286 million and a promise to overhaul corporate procedures -- was part of the penance.

Brazil's Highs and Lows

Still, the fact that one of Latin America's legacy corporations was owning up to "errors" and promising to "repair damages to the country and the company," was a Brazilian watershed. Perhaps corporate confessions will be the new genre in Latin letters.

As I read Andrade Gutierrez's mea culpa last week -- a week when senior lawmakers were on the hook in the Petrobras scam and President Dilma Rousseff was ordered to stand trial on charges of defrauding government accounts -- I couldn't help but think back to another watershed missive.

The year was 2002 and Luiz Inacio Lula da Silva, a raspy-voiced left-winger known to all as Lula, was leading the race for president, much to the dismay of Brazil's aspiring middle class, and especially its corporate elite.

So Lula wrote a Letter to the Brazilian People, ditching his patented capitalist-bashing rant for a pledge to abide the free market, pay Brazil's debts, contain inflation and practice fiscal parsimony. It was not so much a confession as a rebranding -- and it worked. The "new Lula" won the election, then a second term, and went on to steward his handpicked successor Rousseff to back-to-back victories, in 2010 and 2014, crowning the most enduring political dynasties since the return of democracy in 1985.

As that dynasty comes to a profligate and scandal-ridden end, Brazilians naturally might be wondering how they can now go from confession to renewal. "The Brazil brand has been damaged," Joel Velasco, a Latin America analyst at Albright Stonebridge Group, a Washington-based consultancy, told me. "We're looking at another potential lost decade."

Consider that nearly a dozen of Brazil's biggest companies are implicated in the Car Wash investigation, and some have seen their top executives jailed. With their reputations tainted and public works paralyzed, many are bleeding revenues and eliminating jobs. The national construction industry laid off 415,000 workers as revenues fell 7.5 percent last year, according to the Sao Paulo association of public works.

The key to recovery: "the future of the Car Wash," the association stated in its most recent report. In other words, how much more deeply will the fallout from the investigation bite into the nation's economy?

A number of contractors caught out in the corruption scam are following Andrade Gutierrez's lead and negotiating leniency deals. Leniency agreements -- a key feature of Brazil's new anti-bribery laws -- are important because they allow authorities to separate the companies from the criminals within them: Crooked executives go to court, while businesses restructure, reimburse society for damages, and carry on.

But this path is fraught with red tape and overlapping authorities, each with a say in the matter. An agreement with the public prosecutor's office could be rejected by the Comptroller General, which has the power to blacklist companies from bidding for public works. The federal antitrust commission (Cade) and the public accounts court (TCU) can also weigh in.

Squabbling among bureaucrats hasn't helped. "Companies don't know who to talk to or whether any deal will stand," said a consultant to one contractor implicated in the Car Wash case, who asked not to be named. "This has created enormous legal uncertainty." One builder, Mendes Junior, decided against negotiating and was banned from joining public bids for two years. 

The larger worry now is how Brazil can get to the bottom of its biggest corruption case on record without deepening its worst economic slump since the Great Depression.

Joel Velasco puts the Brazilian dilemma in wartime terminology. "We have to figure out how these businesses, some of which are good, can survive in these hard times," he said. "Right now, Brazilians want to investigate everyone and everything, and that's only fair. But if the country wants to recover, at some point we need reconciliation and reconstruction."

Maybe that's the theme for the next open letter to Brazilians.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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