Brazil – New Regime Must Act Quickly

Brazil has been weathering its political and economic crises about as well as might be expected since President Dilma Rousseff was suspended from office in May. The interim government headed by her vice president, Michel Temer, has managed to pull together a majority coalition in the Congress, and took an important step toward restoring fiscal discipline in early August by securing passage of legislation authorizing debt-restructuring for state governments that adhere to strict spending rules going forward. That development has reinforced the positive turn in market sentiment that became evident as the seeming inevitability of Rousseff’s permanent removal —which became official on August 31—eased concerns that the government might be too weak to achieve passage of reforms required to right the economy.
At present, a majority of Brazilians favors Temer serving out the remainder of the current term, but the tide of public opinion could shift abruptly if the government fails to engineer an economic recovery. Although there are indications that the economy is on the cusp of a return to positive growth, persistent inflation has discouraged the central bank from relaxing its very tight monetary stance, contributing to currency appreciation that is undermining the competitiveness of Brazil’s exports. Given the careful balancing of fiscal and monetary levers that will be required to nurse the economy back to health, any recovery in 2017 will be weak, and quite possibly too weak to sustain popular support for the administration.
In any case, the approach of the next election cycle will likely bring renewed uncertainty, as the presidential race looks to be a wide-open affair. Temer will not be eligible to vie for a full term, as he has been barred from standing for public office for eight years owing to violations of campaign-finance rules, and early polls of voter preferences show that there is no clear front-runner to succeed him.
An opinion survey conducted in July found that the most popular hypothetical candidate, with 22% support, is former President Luiz Inácio “Lula” da Silva, who has been indicted on obstruction of justice charges related to the massive corruption scandal at the state-owned oil company, Petrobras. His nearest challenger is Green Party leader Marina Silva, who finished third in the 2014 presidential contest.
Among potential candidates from the current governing coalition, the most popular figure is Aécio Neves, a member of the center-right PSDB, who lost to Rousseff in the 2014 run-off presidential election. However, he also has been tainted by the Petrobras scandal, as have many of the most prominent figures from Temer’s PMDB.
Since 1979, The PRS Group Inc., has been a global leader in quant-based political and country risk ratings and forecasts. For more information on The PRS Group and its wide range of risk products, go to: www.prsgroup.com or contact Michael Burke, Director of Client Relations at (315) 431-0511, extension 311.