Brazil GDP April 2016

Brazil

Brazil: Impeachment proceedings move forward but signs of relief for economy are scarce

April 19, 2016

President Dilma Rousseff came one step closer to being removed from office on 17 April after the lower house of Congress voted to move forward impeachment proceedings, thus continuing the political saga that has gripped Brazil in recent weeks. The decision is a major blow for Rousseff whose popularity has plummeted along with the Brazilian economy and is being investigated for breaking strict budget rules. The proceedings will now move to the Senate and an initial vote to accept the impeachment case is expected in May. If a simple majority votes to continue the process, Rousseff will have to step down for a maximum of 180 days while the trial continues and Vice President Michel Temer from the Brazilian Democratic Movement Party (PMDB) would take over. While the prospect of political change is boosting market sentiment—the country’s Bovespa stock index and the real have risen to the highest levels seen in months—a leadership change will not be a magic bullet for the country’s economy and a number of daunting challenges lie in the path of a potential recovery.

At this point, the pivotal question is, what is next for Brazil? In the political spectrum, the road to impeachment for Rousseff is still long. A number of Senators have already stated that they will vote to accept the impeachment case from the lower house and it is widely expected that the simple majority required to move forward with the trial will be met. If this prediction comes to fruition, Temer will take over—at least temporarily—interrupting over a decade of Workers’ Party governance. Meanwhile, the trial against Rousseff will continue in the Senate under the supervision of the Supreme Court. If a two-thirds majority votes against Rousseff, she will be impeached and Temer will take over until the next elections in 2018.

In the economic space, the implications of a change in government are unclear. Market sentiment has reacted positively to the possibility of impeachment on the hopes that it will serve as a catalyst to correct fiscal imbalances and carry out much needed economic reforms, measures Rousseff has been unable to pass due to lack of support. While Temer has pledged to tackle these issues, it is unknown if he has the backing needed to pass legislation through Brazil’s fragmented Congress and, if the PMDB lacks support, early elections could be on the horizon. Moreover, high profile members of the PMDB are implicated in the ongoing corruption scandal, one of the main factors behind Rousseff’s abysmal public approval ratings, and polls show that Temer would likely face low approval ratings and roadblocks similar to those Rousseff’s administration has faced.

On top of political challenges, the country is grappling with the abysmal state of the economy. Households have been hit by rising unemployment and high inflation, while subdued global trade volumes and low prices for export goods have taken a toll on the external sector. Moreover, rising public debt and dwindling government revenues having diminished government accounts and led to calls for a harsh fiscal adjustment program from market analysts. However, a large portion of government spending is mandated by the constitution, which limits the government’s ability to implement reforms. Joao Pedro Ribeiro, Latin American strategist at Nomura, comments on the outlook:

“Brazil has many outstanding structural problems, both on the political and economic front, we do not see impeachment leading to a change in the near-term economic outlook – although it should improve sentiment and, importantly, increase the chances of better policy and reforms.”

Against this backdrop, our panel of analysts sees another deep contraction this year as political developments continue to take center stage and economic reforms fall to the back burner. LatinFocus Consensus Forecast panelists expect the economy to contract 3.5% in 2016, which is down 0.1 percentage points from last month’s estimate. For 2017, the panel sees the economy growing 0.7%.


Author: Angela Bouzanis, Lead Economist

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