Since Brazil first floated the possibility of impeachment proceedings against leftist President Dilma Rousseff last December, markets have generally responded with optimism. Observers anticipate her removal will mark the beginning of Brazil’s economic turnaround. However, a closer look at the country’s political and economic landscape reveals a more challenging and complex situation.
Tellingly, when Waldir Maranhão, acting speaker of the Chamber of Deputies (the lower house in Brazil’s Congress), attempted to void the chamber’s decision to send impeachment proceedings to the Senate earlier this month (a position he later reversed), market reaction was decidedly negative. In the immediate aftermath of these doubts about impeachment, the Brazilian currency, the real, plummeted by 5% and the country’s Bovespa stock index closed 1.41% lower.
The Senate’s decision on May 12th to start an impeachment trial against Rousseff has led to a six-month suspension for the president and theoretically clears the way for reform. Observers and analysts have argued that interim President Michel Temer will implement much-needed tax, pension, labor, and other reforms, but, in reality, these changes may not be realized.
Immediately upon assuming his new role, Temer, a centrist, vowed to change course on the Workers Party’s (PT) left-leaning economic policies, which contributed to Brazil’s largest primary deficit and the ongoing unraveling of Latin America’s largest economy.
Temer boosted his credibility by appointing former president of the Brazilian central bank Henrique Meirelles as finance minister to advance the reform agenda. Meirelles is Brazil’s fourth finance minister since December 2014, a testament to the challenging nature of the job.
Well-respected by markets, Meirelles has already outlined a plan for cost-cutting. Again, implementation is a different matter. For one thing, such reforms are generally unpopular with rank-and-file voters. Cost-cutting is even more unpalatable in the midst of a severe recession, with growth projected at -3.8% this year, and is compounded by political turmoil and widespread voter mistrust. In short, such reforms could be political suicide. Ultimately, reforms are likely to be watered down and are therefore insufficient to affect real change.
Temer’s party, the Brazilian Democratic Movement Party (PMDB), is the largest party in Congress, with 18 out of 81 senators and 68 of the 513 members of the lower house. The interim president would still need cross-party support to pass requisite legislation to bring about reform.
The opposition Brazil Social Democratic Party (PSDB) is the third-largest political party but unlikely to cross the political divide, particularly as its leader, Aecio Neves, narrowly lost to Rousseff in December 2014. Troublingly, the PMDB has been described by political commentators as little more than a loose coalition of members without a common ideology; this could prove to be an additional obstacle to Temer’s effective leadership.
Moreover, virtually all of the 35 parties represented in both houses of Congress have members who are currently being investigated in the Petrobras corruption probe or for other serious offences. By some estimates, 49 senators and 303 members of the lower house are currently being investigated. As such, policy-making is likely to take a backseat as members of Congress adopt a defensive position vis-à-vis the ongoing corruption investigations.
While not probable, a full-blown governance crisis with voters demanding fresh elections can’t be ruled out. (However, Temer contends this won’t happen.) Indeed, the population’s mistrust for the current crop of politicians is high: While 61% want Rousseff out of office, 58% do not want Temer to head the government, according to findings from a Datafolha poll published in April. The chief reason is widespread concern that the new government would attempt to suppress the Petrobras probe of its members and allies.
The bottom line is that there are no quick fixes for Brazil’s problems, which include the effect of 13 years of expansionary fiscal policy, resilient inflation, endemic corruption, and continued vulnerability to negative exogenous shocks (e.g., from iron ore, soybeans, and crude-oil price volatility). Investor confidence is also low, underscored by sovereign credit ratings now in “junk” territory. Coupled with a higher public-debt burden on the back of a weak real, the near-term prognosis remains gloomy.
Michelle Campbell is a Senior Economist on D&B’s Global Data, Insight & Analytics team. Based in the UK, she covers the Latin American region for D&B Macro Market Country Insight Products. In addition to her experience in the financial services sector, Campbell has worked as a visiting lecturer in the UK and in the Caribbean. Michelle holds a master of science degree in economics from the University of the West Indies in Trinidad.