Brazil’s economy starts to rebound as political crisis festers

Carlos Eduardo Lins da Silva – Wilson Center Fellow

Geopolitical Information Service – 08/23/2016

Brasilia, Aug. 11, 2016: acting President Michel Temer meets representatives of Brazil’s construction companies as he tries to restore confidence in the economy and boost private investment (source: dpa)

Upstaged by the Olympic Games in Rio, the impeachment procedure of President Dilma Rousseff in Brazil’s National Congress will likely conclude by early September, nine months after it formally started. The Senate will enter the final phase of the process, a trial, on August 25. The session will last five to seven days and will be presided over by the chief justice of the Supreme Court, as stipulated in the country’s Federal Constitution.

A two-thirds majority vote, 54 out of the 81 senators, is necessary to convict the president, but odds are that this threshold will be surpassed. On August 9, 59 senators approved the Impeachment Committee’s final report recommending Ms. Rousseff’s conviction; only 21 senators voted in her favor. Back on April 17, the lower chamber in congress voted for impeachment by a 367-137 vote – well above the 342 needed for a two-thirds majority.

At that point, Vice President Michel Temer became acting president and Ms. Rousseff was suspended in her duties. If convicted, she will be barred from running for public office for eight years and Mr. Temer will serve out the rest of her term, until December 31, 2018. If acquitted, Ms. Rousseff will resume her office.

Playing it safe

As interim president, Mr. Temer talks a good game about the urgent need to improve conditions for the Brazilian economy. Little, however, has happened in the form of legislation or other significant steps to advance promised reform. A sense of uncertainty persists in the business community and in society as a whole, despite strong market rallies and tranquility on the streets. The government continues to postpone the announcement of specific action plans and timetables for bills to be sent to congress.

Mr. Temer’s excuse has been that his mandate as acting president is too weak to institute change. He appears to be waiting for Ms. Rousseff’s conviction, which would give him full presidential status. Most measures necessary to contain the worst economic crisis in the country’s history are bound to be unpopular and Mr. Temer is probably wary of losing support if he enacts them before the final impeachment vote.

A recent public opinion poll showed 58 percent in favor of Ms. Rousseff’s impeachment and 35 percent against. But the acting president’s approval rating was only 14 percent, just one percentage point above Ms. Rousseff’s when she was suspended from office. Mr. Temer’s disapproval rating, however, was less than half as much as Ms. Rousseff’s at 31 percent. A solid majority of Brazilians (62 percent according to the polls) would rather have an immediate presidential election than suffer either of those two politicians in office.

Constitutional roadblock

Ms. Rousseff has promised that, if acquitted, she would give up the rest of her term and call a referendum on moving up the 2018 presidential elections to an earlier date. There are serious legal and practical obstacles to this, however. In Brazil, a constitutional amendment is required to change the date of a presidential ballot. To win passage in congress, such an amendment would need to gain the support of three-fifths of the members of both chambers, in two separate votes. Politically, this would be almost impossible to achieve, given the deep divisions on Brazil’s political scene.

Even Ms. Rousseff’s own Workers Party (PT), which has held the presidency for the last 13 years, has discarded the idea of trying to move forward the 2018 elections. The reason for that is the municipal elections scheduled for October 2, 2016 in 5,570 Brazilian cities. The party leadership fears a backlash caused by Ms. Rousseff‘s huge unpopularity and numerous corruption scandals. Under these conditions, the PT’s best strategy might be to lead the opposition against a Temer government.

Looming austerity

The strategy has merits, since the only feasible way for Brazil to crawl out of its current fiscal hole is slashing government spending and increasing revenue. That means adopting policies which, at least initially, will not be welcome to most of society. Whoever opposes austerity stands to gain electoral support, and that is PT’s only hope at this moment.

There is another way, however, to accelerate a presidential ballot: charges of illegal campaign financing. Such charges were filed against the Rousseff-Temer slate in the 2014 election. If the Supreme Electoral Court finds the winners guilty as charged, the 2014 election would be nullified and a new one could be held immediately.
In the event of a verdict this year (an unlikely scenario, given the deliberate pace of proceedings in the electoral court), the new president would be chosen in a normal election, by popular vote. If the ruling came in 2017 or later, congress would pick a candidate to serve out the Rousseff-Temer term.

Although the legal decision would ordinarily be made on technical grounds, the case is so delicate that political considerations are expected to play a role, too. If the Temer cabinet makes progress on stabilizing the situation and its popularity improves in coming months, the court will probably bide its time, postponing a ruling as long as possible. The chances of Mr. Temer staying in office until the end of 2018 would be quite large under this scenario.

How the acting president fares depends mainly on the economy’s performance. There are signs that Brazil’s crisis has bottomed out. Some analysts predict that gross domestic product (GDP) may resume growing in the fourth quarter. Estimates for this year’s contraction have been revised from 3.6 percent to a notch above 3 percent. For 2017, the consensus opinion is for growth after three consecutive years of contraction, the latest prediction for 2017 is a 1.6 percent GDP increase. From 2018, barring the unexpected, Brazil could resume its normal annual growth rate of 2.5 to 3 percent.

Signs of revival

The depreciation of the Brazilian real has led to a healthy trade surplus ($23.6 billion in the first half of 2016) and attracted foreign capital. In an international environment of high liquidity and few attractive assets, foreign direct investment (FDI) in Brazil is projected to reach $70 billion this year.

For many Brazilians, however, the situation remains dire. Unemployment has reached 11.3 percent; among youth in the city of Sao Paulo, it stands at 36 percent. There are almost 12 million people without jobs, most of whom have already exhausted their unemployment benefits. Average pay this year will recede to the 2012 level.

Under such conditions, acting President Temer will find it especially difficult to push austerity plans through congress. Markets have put considerable hope in his economic team, led by Finance Minister Henrique Meirelles, who had a successful stint as president of the country’s central bank during the Luiz Lula da Silva administration (2001-2009).

May 17, 2016: Brazil’s Finance Minister Henrique Meirelles announces his new economic team, which was well received by the financial world (source: dpa)

Mr. Meirelles has already prepared a fiscal adjustment plan that features as its centerpiece a bill that would cap public spending. This implies less public money for basic sectors such as education and health. Measures to contain social security expenditure and cut labor costs are also part of the Meirelles scheme. Fierce opposition from labor unions and social movements is virtually assured.

Although the finance minister has not talked about raising taxes yet, this will be his only option if alternative sources of new revenue, especially sales of state-owned assets, do not materialize. Brazilians, it must be noted, are not fond of privatization and any proposals of this kind are also certain to bring controversy.

Leadership vacuum

In a congressional vote, Mr. Temer can count on support from the former opposition, his Brazilian Democratic Movement Party (PMDB) and, initially at least, most of the “big center” (centrao) – a group of opportunistic deputies from several small parties formerly led by Eduardo Cunha, who lost his job as parliamentary speaker in July 2016 after he was implicated in a bribery scandal. The centrao group is particularly volatile, however, and Mr. Temer will always need to tread carefully.

Should the acting president prove successful against the odds, Mr. Meirelles – as the leader of his economic team – would be a natural candidate for the presidency in 2018. Back in the 1990s, when Brazil impeached a president for the first time (Fernando Collor de Mello, 1990-1992), the administration of his successor, Itamar Franco (1992-1995), turned the economy around in a situation almost as dire as the present one. The then Finance Minister Fernando Henrique Cardoso managed to put out hyperinflation and became so popular as a result that he moved on to become Brazil’s president and then was reelected for a subsequent term; he won both races in the first round.

If Mr. Temer proves less lucky and Brazil’s economy deteriorates further, all bets are off. The country is now suffering from an acute leadership vacuum. Almost all of its best-known political figures have been ensnared in a sweeping anticorruption operation by the federal police code-named Car Wash, which started with an investigation of bribery at the national oil company Petrobras; several other large state companies were later implicated as well.

Next watershed

Former President Lula da Silva, who handpicked Ms. Rousseff as his successor (she had never run for office before), is still Brazil’s most popular politician. That counts for little, however, since polls show him leading potential rivals in the 2018 election with only 20 percent support, as opposed to almost a 50 percent disapproval rating. Mr. da Silva also faces a charge of obstructing justice and has been implicated in three cases of bribery and failure to disclose assets.

Other possible candidates for 2018 are also problematic. Mr. Temer has pledged not to run and may not be allowed to for legal reasons; the environmental activist Marina Silva (who finished third in the last two elections) has not been able to form a strong party of her own; and Aecio Neves, the runner-up in 2014, did not perform well in the opposition and now faces bribery charges himself. The same applies to Foreign Minister Jose Serra, a former presidential candidate. If the charges against him are dropped, however, Mr. Serra looks capable of making a strong run in 2018.

The October municipal elections may bring more clarity to the picture, especially if one of the political parties emerges as the clear winner in key cities. But making predictions at this point is foolhardy. Both the impeachment process and the Olympics have been monopolizing public attention. Starting in September, the municipal elections will become a big issue for most Brazilians and the political pulse in the country will quicken.

Scenarios

Baseline: Congress approves enough of the government’s economic program to give Mr. Temer credibility and spur economic growth. That makes Finance Minister Meirelles or Foreign Minister Serra probable candidates for a 2018 presidential run. New leaders may emerge from the October municipal elections to offer fresh alternatives to the country.

Less likely: Mr. Temer fails to push his reform package through congress. The economic situation worsens, solidifying opposition to the acting president, who either gets impeached, resigns or has his election nullified in court. In any of these scenarios, an indirect presidential election in congress would almost certainly follow.

Least likely: Dilma Rousseff is acquitted in the Senate. She resumes her responsibilities as president and calls new presidential elections.

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