Brazil has been reshaped by Lava Jato, but 2017 is set to be remembered as the year the case
dramatically expanded its reach. Brazilian construction firm Odebrecht’s
admission that it paid some $788 million in bribes to win contracts throughout
Latin America and the Caribbean has set off a wave of corruption
investigations and allegations.

We hope the unfolding investigations and enforcements make
Latin America and the Caribbean better places to invest and do business.
Prosecuting any politician or executive found guilty in connection with the
scandal is a good way to do that, and to set the tone for future graft probes.

What’s concerning, however, is the impetus for the
investigations is not wholly organic, as in Brazil where Lava Jato stemmed from a new legal framework and a judge, Sergio Moro, who was unafraid of targeting high-profile political
and business leaders. Instead the allegations and investigations unleashed by Caso Odebrecht were jumpstarted by a
plea deal involving US, Swiss and Brazilian authorities.

Nonetheless, in the 10 Latin American countries affected, the
implications could be profound. The ramifications for Peru in particular have
the potential to deeply impact the country. Alejandro Toledo, Peru’s former
president, stands accused of receiving $20 million in bribes. Approval ratings
for current President Pedro Pablo Kuczynski have slumped with the development —
PPK has not been accused of corruption, but Peruvians are suspicious of his
roles as finance minister and prime minister during Toledo’s presidency.

At the same time, national champion Graña y Montero is
suffering by association. The share price of the engineering firm plunged by a
third in late February on claims the company was aware of Odebrecht’s bribery
scheme. Graña y Montero denies the allegations.

Some Peruvians fear the unraveling scandal could usher in a
bout of economic instability similar to Mexico’s Tequila Crisis of the
mid-1990s. That’s probably an exaggeration. This episode is unlikely to be
looked back on as the Pisco Crisis. The country’s economic fundamentals are
strong and a rapid devaluation of the sol appears unlikely. But it will be
felt. As a result of the scandal, the government has already revised down its
2017 GDP forecast by a point.

More broadly across the region, the effects of Caso Odebrecht may be more modest on capital
markets than when Lava Jato first
erupted in Brazil. Not all companies are tainted by proximity like in early
2015 when dozens of perfectly responsible Brazilian issuers were locked out of
the bond market for months as investors waited to see how far Lava Jato would extend. Today, bond
sales from Latin American companies continue. Investors are not (yet?)
concerned about buying paper from the wrong firm. That perhaps reflects the
smaller scale of engineering firms outside Brazil more than confidence of the
market. LF