Brazil’s paralysis augurs badly for the country’s next president

Over the past 10 days, Brazil has sometimes seemed a country on the brink of an apocalypse. Usually traffic-clogged highways around Sao Pãulo have been deserted, gasoline stations emptied, and food supplies to supermarkets have dwindled. For lack of poultry feed, there has been a gruesome cull of 100m chickens. There has even been wild talk of a military coup. The cause of such scenes, which seem to come from the 1971 end-of-time film The Omega Man, is a truckers’ strike. The stoppage, which has paralysed the country, is another setback for Brazil’s slow recovery from its worst-ever recession. It also offers a foretaste of the challenges that will face whoever wins October’s presidential election.

At the root of the crisis is the same company tied up with the Lava Jato corruption scandal that has discredited Brazil’s political class and so enraged the population: Petrobras. The former government froze domestic gasoline costs via a huge subsidy paid by the state-controlled energy company. This shielded consumers from the ups and downs of international energy prices — and also transformed Petrobras into one of the most indebted oil companies in the world. Two years ago, President Michel Temer ended the subsidy. But the recent rise in international prices, combined with emerging markets turbulence that has pushed down Brazil’s currency, the real, has caused domestic fuel costs to rise. Truckers, working in a sector at the liberalising frontline of “Uberisation”, and like the rest of the country smarting from the recession, turned off their engines in protest. The country ground to a halt.

The strike has many similarities with the street protests of 2013 — that unexpected channelling of popular anger over corruption that ultimately led to the impeachment of then president Dilma Rousseff. It was spontaneously organised over social media.

The current government has been equally slow to understand what is going on, or how to respond. Mr Temer sought to calm the waters by promising discounts on truckers’ diesel and to de-link domestic and international prices. But that in turn led to a massive de-rating of Petrobras stock, which has lost a quarter of its value. Political opponents, with an eye on October’s election, rounded on him. There is now a copycat strike at Petrobras, too. Perhaps the only reason that Mr Temer, a lame duck president, remains in power is that his term finishes soon.

Most of all the strike has laid bare how Brazil’s economy often works. For many, it is a pie from which they feel entitled to a large slice no matter who loses out. Getting it might include taking a bribe (as in the Lava Jato scandal), or holding Brazil hostage over a fuel subsidy. It is revealing that a majority of Brazilians support the strike, according to polls. It is more revealing that a majority is unwilling to pay for it. The direct cost of the new subsidy Mr Temer has offered is estimated at $4bn. In terms of lost economic activity, the indirect cost is many multiples more.

Unfortunately, Brazil must confront many similar trade-offs soon. Reform of the pension system is the most pressing. Without that, public debt levels will continue to increase, sovereign risk will rise, so too the cost of finance, and the whole country will suffer. Mr Temer, the country’s most unpopular-ever leader, tried and failed to do the job. So that reform is one for the next president — and he or she will face the additional hurdle of managing a highly fragmented Congress. As the popular anger expressed in the truckers strike shows, for whoever rules, governing Brazil is an increasingly difficult task. Investors should price country risk accordingly.