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Brazil: Is this goodbye forever, Dilma?

After meeting for close to twenty hours, the Senate finally delivered its verdict. Dilma Rousseff is suspended, with 55 votes in favour and 22 opposed, for a minimum of six months (180 days) or more (i.e. the end of her term, if she is removed by the Supreme Court). This vote closes more than six months of political instability that followed the motion to bring impeachment proceedings against Rousseff, a motion issued by the Speaker of the Lower House at the time, Eduardo Cunha, who, lest we forget, was also removed from office last week on corruption ground. This decision should be hailed by the markets, at first. Even if the current President has the option of defending herself against the Supreme Court, her chances of returning to power seem quite slim. But you never know!

Whatever happens, even if Rousseff is impeached, Brazil will not be out of trouble yet. In fact there's no doubt that for Rousseff's future replacement, current Vice-President Michel Temer, the burden is great. Politically, he'll have to create a national unity government, which is especially tricky because many members of his party, the PMDB, are also under investigation for corruption - including Cunha. Moreover, polls show that a great majority of Brazilians would rather have new elections than an impeachment to put an end to the political crisis.

Economically, the challenges are just as difficult, if not more so. Temer and his administration are going to have to pull the country out of recession, even though they have zero monetary or fiscal leeway.Inflation (9.3% yoy), while declining, is still well above the upper limit of the target promulgated by the BCB (6.5%), despite a key interest rate at 14.25%. Moreover, the public deficit is now above 10% of GDP, which means that debt is expected to approach 80% of GDP by the end of 2016. Besides, to keep the real from falling any further, the new government is going to have to win international investors over. If monetary and fiscal policy announcements are made, we could see a buyers' market. But there is no doubt that these announcements must be followed up with actions.

For Temer, massive fiscal consolidation at the very moment when unemployment is on the rise might not be welcomed by public opinion and could lead to new protests. Thus, he would risk hurting his chances in the next elections (even though he has mentioned repeatedly that he does not want to run for the next presidential elections, he might not really have a choice), as well as his party's chances in any case. It remains to be seen, then, what Temer will choose: putting his country's economy back together, or preserving the PMDB's chances of taking power in the next elections.

 

 

2016-05-13-keyfocusd

 

HERVE Karine , Strategy and Economic Research at Amundi
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Brazil: Is this goodbye forever, Dilma?
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