Brazil Politics May 2017

Brazil

Brazil: Political déjà-vu - impeachment calls threaten economic recovery

May 18, 2017

Political chaos is engulfing the Brazilian economy once again, after local newspaper O Globo reported that President Michel Temer was recorded discussing and approving illegal bribes to jailed politician Eduardo Cunha. While the recordings have not yet been made public—and have been denied by Temer—the news exploded across the country, leading to impeachment calls and a plunge in the stock market and real as political uncertainty skyrockets. The news was unexpected. Although a number of lawmakers have been implicated in the Lava Jato investigations, Temer had largely been spared until now.

At this point, the implications for the economy are hard to decipher and the incoming news flow has the potential to dramatically alter the course of events. Overall, it seems that economic reforms will get pushed to the backburner in a case of déjà-vu and politics will take center stage. Support for Temer’s crucial social security reform was already low and it was uncertain if it could pass the many hoops of Brazilian policy making. Now, damage to Temer’s ability to govern seems large, increasing the tough task of passing legislation. In a more extreme scenario, Temer’s resignation or impeachment is not off the table since the opposition has filed an impeachment request in the lower house. Moreover, the Electoral Supreme Court is already investigating the President related to the 2014 election and could oust Temer over using illegal funds in the election campaign with former president Dilma Rousseff.

The shaky political scheme is increasing downside risks and could have ripple effects across the economy. Commenting on Nomura’s forecasts, analyst Joao Pedro Ribeiro states:

“The increase in political risk and a worsening of the prospects for fiscal reform will likely exert upward pressure on USDBRL (including our 3.40 yearend forecast). In a scenario of a weaker currency and less certain environment for fiscal improvement, inflation expectations are likely to rise. This combination of factors would hamper the BCB's ability to cut the policy rate from the current 11.25%, which suggests not only that the expected cutting pace is optimistic, but that the terminal rate of the overall cycle (8.5% in our forecasts) could be raised meaningfully.”

According to our latest LatinFocus Consensus report, the economy should return to moderate growth this year after the worst recession in modern history. However, growth will be weak amid austerity measures and high unemployment. Our analysts see the economy growing a meagre 0.7% in 2017, which is up 0.1 percentage points from last month’s forecast. In 2018, the recovery is seen gaining speed and GDP should increase 2.4%.


Author: Angela Bouzanis, Senior Economist

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