Brazil's slide hits U.S. states, exporters, investors

Oil production rigs in Angra dos Reis, Brazil
Dado Galdieri | Bloomberg | Getty Images

Brazil's oil riches once promised to lift its emerging market into the ranks of the world's major developed countries.

But the global crash in oil prices and a widening political scandal involving its state oil company has sent Latin America's largest nation spiraling into political and economic chaos.

The fallout is unraveling a hemisphere away. But for U.S. investors, companies and states with strong trade ties, the crisis is hitting home.

On Thursday, Brazil's Senate voted to impeach President Dilma Rousseff on charges of breaking budget rules, a claim she denies. She has been suspended from office, pending the outcome of her trial, and replaced by Vice President Michel Temer, who is himself deeply unpopular with voters.

The vote closes a chapter in Brazil's political and economic history that saw a succession of left-leaning leaders tap the nation's newfound oil wealth to lift millions of people — in the world's fifth most populated country — out of poverty during a decade of rapid economic growth.

But the crash in oil prices and a massive corruption scandal surrounding the country's oil riches have opened a new chapter of deep political and economic uncertainty.

Economists call it the resource curse. These days, Brazil seems doubly jinxed by the natural resources windfall that once propelled it into the ranks of the world's fastest growing economies but has now mired the government in a crippling corruption scandal.

The country's first woman president, Rousseff, a 68-year-old economist and former member of a Marxist guerrilla group, faces a six-month legal battle that many independent observers believe she will lose.

Regardless of whether Rousseff is convicted, the political climate will remain murky. Much of the rest of the government is mired in a bribery scandal involving the state-owned oil giant, Petrobras.

Once the main engine of growth in Latin America, Brazil now sees an economic reversal that is damaging the entire region's economy. In its latest forecast, the International Monetary Fund predicted that the drag on the region will continue for the next two years, as weak commodity prices and widespread inflation batter the prospects for growth.

The IMF's latest estimate sees the region's recession deepening, with the economy shrinking by half a percent in 2016, the second year of contraction. But much depends on how the political crisis plays out, the forecasters said.

The political chaos comes as falling oil and other commodity prices have cut deeply into Brazil's export-heavy economy. Now, political upheaval has thrown the country, and its faltering economy, into further chaos.

With this being the world's seventh-largest economy, the contraction will hurt global growth as well. Brazil's economy is shrinking even faster than fellow emerging market Russia, which has been wracked since the second half of 2014 by economic embargoes and plunging oil prices. Its GDP lags far behind the rest of the "BRICs" — the group that is made up of Brazil, Russia, India and China.

The U.S. also has strong trade and investment ties to Brazil. With the country being America's ninth-largest merchandise trading partner, the flow of exports and imports hit a record $109 billion in 2014, amounting to a $12 billion trade surplus for the U.S.

Brazil is a major importer of U.S. oil, largely from Texas, and machinery, aircraft, electronics, and optical and medical instruments. The United States is also the biggest foreign investor in Brazil, with a total of $78 billion invested as of 2013. Brazilian investment in the United States more than doubled to $14.9 billion from 2009 to 2013.

Aside from trade in goods, Brazil is a major consumer of U.S. services. Brazilian tourism to the U.S., for example, is at an all-time high, according to U.S. trade data, and the fifth largest source of international visitors. A record 2.3 million Brazilians visited the U.S. in 2014, triple the number in 2007.

Now, as the Brazilian economy contracts, it's not yet clear how deeply the impact will be felt on U.S. companies and investors.

The recent bump in oil prices has given Brazil's economy some temporary breathing room. But it remains to be seen whether prices of other commodities recover to levels that will help lift it back into growth.

With inflation topping 10 percent — the highest in 13 years — Brazil central bankers have little room to lower interest rates to try to stimulate growth.

As the bank struggles to bring inflation back down to a target of 4.5 percent by 2017, rates remain stubbornly high. Last month, the central bank's eight-member board kept its benchmark lending rate unchanged at 14.25 percent for the sixth straight meeting, despite widespread appeals from politicians, investors and business leaders to cut borrowing costs and reverse the economic downturn.