Political Risk Outlook: Will Brazil's Economy Get Back On Track In 2016?

Political Risk Outlook: Will Brazil's Economy Get Back On Track In 2016?

September 2016


Brazil is bogged down by an ongoing political crisis and gargantuan economic problems. Dilma Rousseff, the country’s president, a left-of-center politician, was forced to step down and allow her vice president, Michel Temer, to take over as interim president. Although Wall Street analysts are applauding the leadership transition, Temer still has to show that he is capable of tackling the immense challenges his country’s economy is facing. Public debt has ballooned to more than two thirds of GDP. Brazil is also battling inflation that tops 7%, more than double the rates recorded in Peru and Mexico. Brazil is the largest economy in Latin America and is still a big market for companies such as Ford, AmazonIBM, Nike and Monsanto. But the economic turmoil has certainly had an impact. Nike in particular has seen a big drop in sales in Brazil. While not as fraught as the situation in Venezuela and Argentina, Brazil’s economic problems are dire. The country has new leadership but still faces a lot of obstacles on the path towards prosperity. To get a sense of what investors can expect moving forward, I reached out to Jimena Blanco, the Head of Latin America at the consultancy Verisk Maplecroft.

Nathaniel Parish Flannery: So Rousseff is out and Temer is in. Is this permanent?

Jimena Blanco: The only precedent of an impeachment process in Brazil suggests that under typical circumstances, it is nearly impossible for the suspended head of state to reverse the political momentum and return to office. However, Brazil’s current political climate is anything but ordinary and Rousseff will try to exploit the apparent fragility of Temer’s administration to try to have the impeachment case dismissed.

Temer’s interim government had been badly hit by the content of recently leaked conversations between senior PMDB leaders and the former President of Transpetro, Sérgio Machado. The conversations have led some credence to Rousseff’s claims that the PMDB was using the political crisis to take control of the executive without going through the ballot box and raised serious concerns about the real motivation behind her impeachment. As a result, some senators have already declared they may change their vote in the next impeachment ballot. The numbers in favor of impeachment are tight; therefore, the final outcome could be determined by a handful of senators, increasing the unpredictability of the result.

The pro-impeachment camp needs to secure a two-thirds majority of 54 votes for the process to move from the current instruction phase into the phase of the trial. In May, Rousseff was temporarily removed from office with 55 votes. Theoretically, Rousseff would need to convince two more Senators to vote against her removal in order for the impeachment process to be dismissed.

However, Temer could benefit by changes in the opposite direction, meaning that the change of only two votes would not be enough for Rousseff to return to power. In the May ballot, Senate President Renan Calheiros did not vote because he was presiding over the process. In August, the Supreme Court’s Chief Justice, Ricardo Lewandowski, will be heading the proceedings, enabling Calheiros to vote for the impeachment. Furthermore, two PMDB senators who also abstained in May because they remained in the Rousseff government are expected to back the impeachment in August.

While the two sides prepare for the day of reckoning, the Lava Jato case will continue to bring skeletons out of the closet and it is impossible to predict whether these will benefit the pro- or the anti-impeachment team. Just like they did in April during the ballot in the lower chamber, Brazilians will have to watch the televised vote in August as if it were a penalty shoot-out. Temer currently has the advantage but, albeit unlikely, there is room for Rousseff to battle against the odds and return to office. So, the show won’t be over until the 54th vote in favor of Rousseff’s removal is cast.

Parish Flannery: It doesn’t sound like it’s very likely that we we’ll see Rousseff back in office again. What are the implications for policymakers?

Blanco: In the unlikely event that Rousseff returns to office, she could make changes to some of the policies implemented by Temer. However, the extent of such modifications would depend on whether the policy choices were made through executive decisions or whether they were implemented through legislative reform. In the case of the latter, it would be extremely difficult for a politically weak Rousseff to unravel reform.

Temer’s economic policies have been well received by the markets, which are wary of Rousseff and would react negatively to her return. Therefore, she would have to be extremely prudent and accept the changes that have helped restore some confidence in the country. Sticking to her guns would only maintain economic and political uncertainty and volatility high.

Latin America GDP Growth 2016 6.2.16 EDITED


Parish Flannery: Will political instability add to Brazil’s woes or do you think the country’s economic problems more structural in nature?

Blanco: A politically strong administration during 2015 could have implemented policy reform to lessen the extent of the country’s economic crisis. That ship sailed a long time ago and the economy has been left effectively rudderless for more than a year. This is why Brazil is now grappling with the deepest recession in living memory. GDP contracted 0.3% in the first quarter of 2016, meaning that the chances of a robust near-term recovery are almost non-existent.

Despite some slight improvement registered in business and consumer confidence indicators in April, domestic demand will remain weak for the foreseeable future. This in turn will continue to depress the rate of investment, which shrank by more than 17% in the first quarter. Unemployment has reached record highs and more than 11 million Brazilians are now out of work. Therefore, while political stability could help policymakers restore investor and consumer confidence, it will not in its own right resolve the country’s structural economic problems.

Additional Reading: Venezuela’s Economic Emergency

Parish Flannery: Are there any easy policy solutions the government can implement in the short-term to get the country’s economy back on track? 

Blanco: There is no magic, single policy that would solve Brazil’s current crisis and allow the economy to grow in 2016. Instead, several factors need to come together if economic recovery is to be realized in 2017 to open the door for the possibility of some tepid growth in 2018. Political stability is, undoubtedly, the essential first ingredient. Unless the political class is able to restore public and market confidence within the next six months, any economic improvements will remain extremely fragile until a new president secures a strong popular mandate in the 2018 general elections.

Latin America Inflation 2016 6.2.16 EDITED

On the economic front, the need for fiscal adjustment is unquestionable. The Temer administration has the political will, as well as a trusted and respected economic team, required to undertake this immense task. Furthermore, Temer also appears to have the congressional support required to approve spending cuts, which is not easy given constitutional restraints that make the country’s expenditure framework quite rigid.

The government has also shown signs of pragmatism and a willingness to undertake necessary, but politically controversial, reforms. For example, the interim administration has backed a legislative bill already approved by the Senate that would reform legislation pertaining to the exploitation of Brazil’s vast pre-salt hydrocarbons deposits. The current system has kept foreign investors at bay, particularly due to the mandatory operatorship clause that would force private companies to partner with the troubled state oil company.

Two other government proposals relate to the much needed and equally controversial reforms of the pensions and labor codes, which require constitutional amendments. Opposition to these changes will almost certainly result in labor unrest and spark anti-reform protest movements as legislative initiatives work their way through congress. That said, failure to tackle these structural problems would render the country’s future economic performance highly unpredictable.


This article was written by Nathaniel Parish Flannery from Forbes and was legally licensed through the NewsCred publisher network.

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may be used as a generic term to reference the corporation as a whole and/or its various subsidiaries generally.  This material does not constitute a recommendation by BNY Mellon of any kind.  The information herein is not intended to provide tax, legal, investment, accounting, financial or other professional advice on any matter, and should not be used or relied upon as such.  The views expressed within this material are those of the contributors and not necessarily those of BNY Mellon.  BNY Mellon has not independently verified the information contained in this material and makes no representation as to the accuracy, completeness, timeliness, merchantability or fitness for a specific purpose of the information provided in this material.  BNY Mellon assumes no direct or consequential liability for any errors in or reliance upon this material.