After Lula da Silva’s detention, what’s next for Brazil?

After Lula da Silva’s detention, what’s next for Brazil?

A corruption scandal in Brazil has reached one of Brazil’s most well-known and popular politicians, when federal police briefly detained former President Luiz Inácio Lula da Silva last week.

An investigation into contracts awarded by state-owned oil company Petrobas, where investigators allege firms and businessmen paid corrupt officials exorbitant amounts of money in bribes, has resulted in bribery allegations against dozens of senior politicians and some of the country’s richest executives.

Brazilian prosecutors investigating the case allege that more than $2 billion (USD) in kickbacks were paid by companies, including to some of the biggest names in infrastructure and construction, who sought contracts with the state-run oil company.

In addition, prosecutors allege, a percentage of those bribes was concentrated towards politicians in the ruling Workers’ Party. But they can now confirm there are politicians from every major party indicted or being investigated, such as Eduardo Cunha, Brazil’s powerful speaker of the lower house of Congress, or Senator Delcídio do Amaral, a member of the Workers’ Party and the Senate whip.

Other major figures arrested in the corruption scandal include construction tycoon Marcelo Odebrecht and political campaign guru Joao Santana. Mr. Odebrecht was just recently sentenced to more than 19 years in prison by the Brazilian judge who is leading the corruption scandal investigation.

Lula da Silva detention a game-changer

Mr. Lula da Silva is an icon to supporters of the ruling Workers’ Party, and is contemplating a run for presidency in 2018. Detaining a former president and potential presidential candidate shows the people of Brazil that no one is above the law. If convicted on money laundering charges, then Lula da Silva would be obligated to carry out the sentence, squashing any hope for a presidential run.

Markets in Brazil reacted positively to the news of the detention of Lula da Silva, which led to an immediate rise in Brazil’s struggling stock and currency markets. However, Brazil’s economic future remains dark, as the economy has shrunk by 3.8% in 2015, and is expected to contract by 3.4% in 2016.

Mr. Lula da Silva’s brief detention is a game-changer that could have far-reaching consequences. The prosecutors’ strategy to publicly detain Lula da Silva can have the effect of politicizing the corruption scandal and further dividing the country, all in the name of fighting corruption.

What does this mean for Brazil’s president?

President Dilma Rousseff is currently battling impeachment proceedings launched last year by Brazil’s lower house of Congress. Rousseff stands accused of manipulating the numbers of Brazil’s budget to hide its poor fiscal performance, a charge she denies. The charge has caused her to lose political credibility within her party and among former allies.

Well-designed economic restructuring is essential, but Rousseff’s uncertain grip on power has led to political instability. The impeachment effort and corruption scandal have significantly weakened her administration’s ability to govern, much less given it time to focus on a strong economic recovery plan.

Effect on the Brazilian economy

Immediately after Lula da Silva’s detention was announced, Brazil’s currency gained more than 3% against the dollar and shares in Petrobras increased by 14%. However, this sudden bump in currency and stocks does not ease the current economic crisis.

While this is partly due to low commodity prices and a sluggish global growth, continuing news of corruption at the highest levels has discouraged investors.

In addition, Rousseff’s declining popularity forced her to replace Joaquim Levy as Minister of Finance. Levy was strongly reform-minded. Considering that the next presidential election is only scheduled for 2018, it is difficult to foresee how Brazil will have the political will to put its public finances on a sustainable recovery.

Until then, it does not look like Brazil will be in a political position to fully implement economic reforms that might take the country on a higher growth track.

A fresh political start with an administration that is more market-friendly than the current government could be the medicine Brazil needs. Lower interest rates are necessary but inflation must be brought down, which requires a lengthy period of currency stability. It is unclear how the country’s financial crises will be resolved, given the state of its politics.

If all else fails, then Brazil may have no other option but to restructure under the umbrella of the IMF, in order to survive.

Categories: Latin America, Politics

About Author

Yesenia Lugo

Yesenia Lugo has written and worked on global governance and international financial institutions (IFIs) for a Washington, D.C. NGO. Her interests include economic opportunities, emerging financial markets and fiscal transparency reform. Yesenia holds a Masters in Diplomacy and International Relations from Seton Hall University, where she specialized in economic development and international security.