Macroscope | What Brazil’s turmoil says about corruption in emerging markets from South Africa to Malaysia

It takes a brave investor to be bullish on Brazil.

What began two years ago as an investigation into a bribery scandal at Petrobras, the country’s state-run oil company, has since morphed into a debilitating political, economic, financial and constitutional crisis.

The scandal, dubbed “Car Wash”, in which dozens of prominent business executives and politicians have been arrested (or are under investigation) on suspicion of inflating the value of Petrobras contracts and using part of the proceeds to pay for bribes and electoral campaigns, has helped pull the rug out from under Brazil’s economy, severely undermining what was perceived to be one of the greatest emerging market (EM) success stories.

Last year, Brazil’s economy shrank nearly 4 per cent – and nearly 6 per cent in the final quarter – compared with a growth rate of 7.5 per cent in 2010. Not only is Latin America’s largest economy suffering its worst recession since the 1930s, the end of the commodity supercycle, which fuelled Brazil’s growth in the first decade of this century, has exposed long-standing economic vulnerabilities which the ruling Workers’ Party conspicuously failed to address.

Not surprisingly, Brazilian assets have taken a pounding over the past few years.