Brazil’s suspended president, Dilma Rousseff, has officially been removed from office after 61 of 81 senators voted for her impeachment on August 31.
While the end of the governance uncertainty that has plagued Brazil for a year will be welcomed by markets, economic improvement won’t be straightforward.
Now that President Michel Temer is no longer just an interim president, he faces the difficult task of passing unpopular reform to lead the country out of its worst recession in a decade: IHS expects the economy to contract by 3.1% this year; inflation is currently around 12%; and the fiscal deficit stands at around 10% of GDP.
“Temer has a very good relationship with business groups and the Brazilian media who welcome his pro-business stance and in the short term, there will probably be a positive reaction by the market, but our view is that in spite of this, he will have an uphill battle,” Carlos Cardenas, IHS Markit head of Latin America country risk analysis and forecasting, tells GTR.
He explains that the new president only has a very short time to pass crucial reforms: the congressional session ends in December, and political parties will be distracted by municipal elections taking place in October, with various campaign influencing decisions in Congress.
After that, Congress will resume activities in February – a famously unproductive month because of Carnival – and campaigning for the 2018 presidential election is set to start by mid-2017.
“He will need to seize the opportunities presented to him, to try to shape measures to fix the economy as soon as possible. If he doesn’t do this by the end of 2016, it is very unlikely that he will effectively manage to fix the urgent economic problems, because everything will be hijacked by the presidential election in 2018,” Cardenas adds.
With these time constraints in mind, he believes Temer is likely to focus on the urgent need to get the fiscal deficit under control, by generating investment.
“It is very likely that he will push in the short term for the privatisation of certain assets – they have made efforts to privatise at least four airports, they have announced plans to possibly privatise electricity distribution, and also sell some of the participation that Petrobras has had in certain projects,” he says.
Besides the issue of convincing domestic and foreign investors to bank on Brazil after over a year of Car Wash (Lava Jato) news headlines, Temer will also face resistance from unions, who still support Rousseff’s workers’ party (PT).
“Temer and his team are promising the removal of legislation that grants Petrobras monopoly on the development of oil fields. This bill is currently awaiting approval in congress, but this something that unions strongly oppose. At the same time, the unions oppose existing plans, which are welcomed by the power sector, to potentially remove local content requirements. If Temer moves ahead with his plans, he will also face strikes and opposition from unions,” Cardenas says.
Temer has also hinted at the potential to increase taxes and review pensions, but in a recession environment, the passing of such reforms seems very far-fetched.
Finally, no one is forgetting that Temer has been named in the Lava Jato investigation as having received illegal funding for his 2014 electoral campaign, though he has denied any wrongdoing.
“Our assessment is that the Supreme Electoral Court (TSE) will not act immediately on the allegations and will possibly let the issue drag through 2017. Even with the electoral charges against Temer on the table, he can appeal, while legally being able to serve as president,” Cardenas adds, pointing out that the current president of the TSE, Gilmar Mendes, is widely regarded as an open critic of Rousseff and her PT, and therefore likely to be flexible with Temer.