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New scandal threatens Brazil’s recovery

Americas / 24-05-17 / by
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A corruption investigation into Brazilian President Michel Temer could hamper the country’s reform agenda and hurt its already painful economic recovery.

Brazil was rocked by yet another political scandal last week, as a recording of Temer allegedly giving his consent to buy the silence of Eduardo Cunha, the former head of Congress, was released as part of the Car Wash (Lava Jato) investigation.

The recording was provided by the brothers who control Brazilian meat processing giant JBS, Wesley and Joesley Batista, as part of a plea bargain in their own corruption investigation. Cunha was jailed for 15 years at the end of March.

In the wake of the scandal, the Brazilian Supreme Court launched an investigation into Temer – the first time an active president is subject to such a process – while Temer himself swore he was innocent and vowed not to resign.

“The accusations about Temer were sort of unexpected. People overseas were surprised he was involved. The real issue that the market is worried about is the reforms, whether they will progress or not. Temer is trying to give the message to the market that the reforms will progress,” a Brazilian trade insurer tells GTR on condition of anonymity.

But the future of the reforms is uncertain: first, there is no guarantee that Congress will continue to implement Temer’s agenda now that he is under investigation. Second, popular pressure for his impeachment redoubled in light of the new revelations.

“There will be popular pressure to hold elections before the end of the current term. It’s complicated because you need to follow the law, but then again, the procedure that was used to impeach [former president] Dilma [Rousseff] was not so lawful, it yielded to popular pressure. They could do the same with Temer, because the popular pressure is speaking louder than the law,” the insurer adds.

If Temer is impeached, or changed his mind about a resignation, no one really knows what would happen: the constitution dictates that the president of the chamber of deputies, Rodrigo Maia, is next in line, but there is a strong possibility early elections would be held. And recent polls show that former president Luiz Inacio Lula Da Silva, who is also being investigated, would win the presidential election if it was held in the near future, most likely reversing Temer’s efforts to liberalise the country.

According to GTR’s source, the best-case scenario would be for Temer to remain in power at least until the end of the year – time to pass all-important reforms of labour laws and social security and, potentially, prove the corruption allegations against Lula, preventing him from running again.

“The most crucial thing right now is reforms. If legislators are able to dissociate the political side from the reforms, whoever is the president, then this scandal will have a limited impact on the economic recovery.  But if they don’t, then it will have a strong impact.

“We need to change labour laws to allow more foreign and domestic investment in the country. Yes, politicians robbed the country and that’s terrible, it all contributed to the hole in the budget, but now we need to think about the future and pass the reforms to fix this,” the insurer adds.

Worryingly, ratings agency Standard & Poor’s this week threatened to downgrade Brazil further – it is already at ‘junk’ level. If this happens, it will take at least two years for Brazil to return to investment level, and hopes of exiting the worst recession in the country’s history – GDP went down 3.8% in 2015 and another 3.6% in 2016, but growth was expected to stabilise around 0% in 2017 – will take a big hit.

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