&l;p&g;&l;img class=&q;dam-image getty size-large wp-image-963976334&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/963976334/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Demonstrators protest against high fuel and cooking gas costs in front of Petrobras oil company headquarters in Sao Paulo, Brazil on May 30, 2018. Photo by Cris Faga/NurPhoto via Getty Images.
Brazil&s;s three-year-old political crisis ebbs and flows. We may be entering&a;nbsp;the eye of the hurricane again, with October elections setting the table for what is to come regarding&a;nbsp;state intervention into the market. The economy is going to take a hit.
Besides the CEO of Petrobras stepping down and the Brazilian currency crash landing and an entire populous up to here in disgust with every single politician in Brasilia, the immediate fallout of a weeklong truckers strike will be felt by midsize companies and the biggest lenders, Fitch Ratings says.
&a;ldquo;It is difficult to make specific assumptions on the impact on the economy. But after ten days into the strike, the market expects a reduction of GDP growth,&a;rdquo; says Claudia Gallina, a senior director for Fitch in Sao Paulo.
Good luck finding a bank raising their growth forecast for Brazil.&a;nbsp; Santander reduced their call for 2018 GDP to 2% from 3.2%. That&s;s a huge drop. A slower economy makes it harder for Brazil to reverse stubbornly low employment.
Unlike other crises Brazil has faced in the past, companies and individuals lacked basic inputs for production and consumption because those things were not being delivered to them&a;mdash;like propane for cooking. The strike created a crisis of supply, mainly impacting every fuel segment. This is further exacerbated by Brazil&a;rsquo;s perennial underinvestment in infrastructure for other modes of transportation. Roads are used for the distribution of more than 70% of the production of goods within the country, and they were blocked for about 8 days.
&l;img class=&q;dam-image getty size-large wp-image-963976356&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/963976356/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Left-wing activists have used the strike as a reason to protest the Temer government and reignite old concerns that Brazil is opening its oil wealth to foreigners. Photo by Cris Faga/NurPhoto via Getty Images.
The reason for the strike: Brazilian President Michel Temer hiked diesel fuel by 10%. Truckers protested. Food wasn&a;rsquo;t delivered. Jets couldn&a;rsquo;t get fueled up. Animal feed wasn&a;rsquo;t being delivered and chickens were reportedly cannibalizing themselves. Then Temer extended a price break for 60 days. Then he said he would cap prices. Then Pedro Parente, Petrobras&a;rsquo; CEO, who was brought in to make the company more adherent to the market rather than to the politicians that spent the last decade ransacking it, decided to resign. No one was surprised. But Petrobras shares fell under $10 for the first time since February 2015, when they were worth about $3.
Petrobras will likely trade sideways as investors weigh who will take Parente&a;rsquo;s spot. And whether price controls are coming back. No one has an answer to this question because the presidential election in October could change everything for Petrobras. Temer could hire Rex Tillerson to lead Petrobras, and Rex Tillerson could find himself fired again a few months later under a new president.
There are no front-runners this campaign season other than jailbird ex-president Luiz Inacio Lula da Silva. His polling numbers are irrelevant at this point. Like many other politicians and business executives, Lula is in jail for his role in the massive Petrobras contract rigging schemes that brought that company&a;mdash;and the country&a;mdash;to its knees. He cannot run for office, even if released from prison, due to the country&a;rsquo;s Clean Slate law. The law bans&a;nbsp;people convicted by an appeals court from running for public office for eight&a;nbsp;years.
It made perfect sense that Brazilian truck drivers, many of them self-employed, would protest the increase in diesel prices. To them, it was more money going to more crooked politicians, and coming out of their pockets.
When Petrobras began pegging fuel prices to international oil markets last year, it went unnoticed by&a;nbsp;commercial drivers until oil prices began to rise dramatically and the Brazilian real began to approach R$4 to the dollar.
&a;ldquo;Because of the strike, companies may face further difficulties in generating positive operating cash flow, regardless of a relatively benign macro scenario amid lower interest rates,&a;rdquo; Gallina says. &a;ldquo;Consumer confidence is likely to decline.&a;rdquo;
Jumps in prices over the last couple of weeks will impact inflation, but it is unlikely to make the central bankers hawkish. Brazil interest rates aren&a;rsquo;t going up in the near term but will be rising sharply in the year ahead if interest rate futures trading on the B3 in Sao Paulo are any guide.
For Morgan Stanely, the strike could bring GDP down by as much as 30 basis points.&a;nbsp;As global banks revise their outlook for Brazil, the incumbent party and its allies, which include the Social Democrats, or PSDB, the market&a;rsquo;s favorite, will be hard pressed to tell the electorate that they are good stewards of the economy.
Cielo, the merchants payment company, reported some preliminary numbers&a;nbsp;up to Sunday, May 27, and said that overall retail revenues were down 28% compared with the previous year. Their gas station clients led the fall with a 60% dropoff.
&l;img class=&q;dam-image getty size-large wp-image-963553226&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/963553226/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Brazilian President Michel Temer&a;nbsp;is probably the most unpopular president in the nation&a;rsquo;s history. Photo by NELSON ALMEIDA/AFP/Getty Images.
Morgan Stanley economist Arthur Carvalho Filho in Sao Paulo thinks the more worrisome impacts of the strike will be felt on the confidence front.&a;nbsp;&a;nbsp;Brazilians are fed up, and few are impressed with the roster of candidates running for the presidency. Brazil seems totally leaderless. Investors will begin paying close attention to this once campaign season kicks into high gear in late July.
It&a;rsquo;s true that Petrobras may never cap fuel prices. The government will probably cut taxes on fuel, namely the so-called PIS and Cofins taxes. That will alleviate much of the price hike Temer imposed late last month. But then the question is: Where will Brazil make up for that revenue loss? What politician wants to cut social spending in an election year? Who will be the one to cut it in 2019? Unless someone makes those hard decisions, Brazil&a;rsquo;s investment-grade days are still a ways away.
&a;ldquo;Given the impact already on the perception that there is popular support for targeted tax cuts to comply with the truck drivers&a;rsquo; demand, Brazil watchers are left wondering if this means it is unlikely a president who would continue the reform agenda in October,&a;rdquo; says Carvalho.
Political risk coupled with the impact of the truckers&a;rsquo; strike&a;nbsp;is going to pull the rug out from under Brazil.
Petrobras might rebound from its single-digit lows&a;nbsp;hit in intraday trading Friday. But lower growth raises fresh doubts for a country still reeling from two years of economic recession and at least 14% national unemployment.