Brazil – Rousseff under Fire

BRAZIL – ICRG RISK ASSESSMENTS

POLITICS
Rousseff under Fire
President Dilma Rousseff has been forced into a defensive crouch amid an onslaught of interrelated crises that are contributing to a very real risk of her downfall before the expiration of her second and final term in office in January 2019. An ever-widening corruption scandal involving the payment of kickbacks by contractors providing services to Petrobras, the state-owned oil giant, has triggered a governance crisis that is undermining the Rousseff administration’s ability to act decisively to revive a slumping economy.
Weak prices for Brazil’s main commodity exports, including soybeans, crude oil, and iron ore, has contributed to slowing growth, slumping investment, the steep depreciation of the currency, and a shortfall in budget revenues. The slide of the real has fueled high inflation, prompting the central bank to hike interest rates, with the most recent of six half-point increases since the start of the year pushing the benchmark Selic up to a growth-strangling 14.25% in late July. At the same time, signs of weakening investor confidence and warnings from credit-rating agencies in response to the government’s significant reduction of the primary surplus target have put pressure on policy makers to make steep spending cuts and hike taxes, which, if implemented, figure to deepen and prolong an economic downturn that has contributed to rising unemployment and growing public discontent.
Rousseff’s approval rating has plummeted to single digits, the lowest level ever for a Brazilian president, and mass protest demonstrations organized in recent weeks have featured increasingly loud calls for impeachment. Her vulnerability to a hostile move by the Congress has grown as powerful allies implicated in the corruption scandal have begun to turn against a president they no longer trust to shield them from legal difficulties. Indeed, Rousseff has been put on notice that she can no longer depend on the unified support of the Brazilian Democratic Movement Party (PMDB), whose support is essential to securing approval of urgent economic measures and fending off the threat of impeachment.
A key figure in the unfolding political drama is Eduardo Cunha, the speaker of the lower house of the Congress, who has been targeted by authorities investigating the Petrobras scandal. As the enormity of the scandal became apparent earlier this year, Cunha made clear that the president should not count on the PMDB’s legislative support if she was not willing to protect him and other members of the party from prosecution on charges that he claims are baseless and politically motivated. A recent shift in his position on the question of impeachment suggests that he is losing confidence in Rousseff’s reliability on that score.
Back in April, Cunha rejected out of hand the suggestion that he would permit the initiation of impeachment proceedings against the president, despite the fact that Rousseff’s removal would position Vice President Michel Temer, the leader of the PMDB, to succeed her in the top office. At the time, it appeared that Cunha was content to keep the impeachment option in his pocket, to be pulled out in case of an emergency.
He removed it from his pocket in July, informing a group of journalists at a breakfast gathering that he had requested a legal analysis of the case for impeachment, the result of which would inform his decision about how to proceed. The reason for the change of heart became clear one day later, when Cunha publicly announced his break with the president, accusing the government and Prosecutor-General Rodrigo Janot of conspiring to incriminate him in the Petrobras scandal.
Cunha has further threatened to lobby for the PMDB’s formal withdrawal from the governing coalition at a party congress that will be held in September. If he succeeds, Rousseff would have little hope of building an alternative majority coalition. In the president’s favor, the PMDB’s leader, Vice President Temer, has both publicly and privately pledged his commitment to ensuring that Rousseff serves out her full term. However, his ability to enforce unity within his notoriously fractious party is open to question, and even he is unlikely to support the president if she were to become directly implicated in wrongdoing.
Although there is no evidence linking Rousseff to the scandal, the shadow of the investigation has moved dangerously close to the president, whose claim of innocence has been met with skepticism in some quarters, given the fact that she chaired the Petrobras board of directors during much of the period when the illegal payments were made. In any case, there are credible allegations that at least some of the kickbacks were channeled into the PT’s accounts, and were used to finance Rousseff’s 2014 re-election campaign, among others. Dozens of PT operatives have been caught in the anti-corruption dragnet, including the party’s treasurer, who was arrested in April on charges of soliciting bribes in connection with the Petrobras operation.
In terms of Rousseff’s own political survival, the most immediate threat is posed by fiscal irregularities that may have enabled the government to illegally increase spending ahead of the October 2014 presidential and legislative elections. Earlier this year, the Federal Audit Court (TCU) uncovered evidence that the government delayed the transfer of some $11 billion in funds to public banks for the payment of social security, unemployment, and welfare benefits in 2014, presumably to artificially boost the fiscal position. As a result, the banks were forced to make the payments from their own holdings, in violation of the fiscal responsibility law.
The TCU is required to either approve or reject the government’s management of the budget in the previous year, and rejection could be grounds for impeachment. The government has appealed the TCU’s ruling, and President Rousseff has been ordered to submit a written explanation for the delay in the transfer of the funds. The deadline for complying with the TCU’s order has been extended to early September, by which time the drumbeat for impeachment could reach a deafening volume.