Tuesday, May 10, 2016

A Year Of Political Instability For Brasil

A Year of Political Instability for Brazil

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With a presidential impeachment vote looming in Brasilia, the question remains whether a new president can bring political and economic stability to Brazil. Having lost an impeachment vote in the lower house in April, President Dilma Rousseff now seems poised to lose an upcoming vote in the Senate. But even if Rousseff's administration falls by the wayside, Brazil's political problems will be far from over. Depending on how internal political developments play out over the remainder of the year, the country may soon have to elect a new president. Consequently, Brazil may not experience sustained political stability until 2017 at the earliest.
After months of political negotiations, Brazil's presidential impeachment process is approaching a decisive date. On May 11, the Senate will hold a vote on whether to remove the president from her post for the duration of impeachment hearings, possibly up to six months. The Senate requires only a simple majority to remove Rousseff from her post, making it highly likely that the president will lose this vote. Once the hearings are concluded, a vote must be held on whether to impeach the president. To approve the motion, a two-thirds majority is required. After the interim president of the lower house, Waldir Maranhao, alleged procedural irregularities, the lower house annulled an earlier impeachment vote against the president on May 9. Nonetheless, the Brazilian Senate said it would keep going with impeachment proceedings regardless of what the lower house leader says. Although Brazil's Supreme Court could rule on whether that annulment is legal, doing so would only delay matters further.
In the meantime, Vice President Michel Temer will hold the presidency. The first priority for a Temer-led administration will be cutting back on public spending, which increased in recent years as a deepening economic crisis reduced the central government's tax revenue. A key objective for a new administration would be securing the congressional support necessary to pass legislation enabling the central government to cut social spending. Brazilian law sets constitutionally mandated minimum levels of government spending on education, health and other social outlays. Achieving the political support necessary to shift the minimum levels could give the government more leeway in planning public expenditures amid a severe recession. But such a move is unlikely to endear the administration to poorer segments of society, and it is plausible that the Workers' Party could capitalize on resulting discontent. Another priority for the new government is liberalizing Brazil's energy sector in hopes of spurring investment. A new administration could loosen local content requirements and repeal regulations that allow oil corporation Petroleo Brasileiro to reserve up to 30 percent of pre-salt fields for itself. Pre-salt layers, geological formations that accumulated on continental shelves around 510 million years ago, are known to hold significant petrochemical resources but are expensive to exploit.
But Temer's potential difficulties likely would not be limited to a national dispute over public spending cuts. He faces an ongoing investigation into the financing for his 2014 re-election campaign, which allegedly included funds obtained from corrupt activities related to the Petrobras scandal. Eventually, Brazil's Supreme Electoral Court will issue a final ruling on whether such illicit funding constitutes a crime for which Temer should be removed from office. If the court rules against Temer, a new presidential election would have to be held. What kind of government the election would bring to power is uncertain. Former president Luiz Inacio da Silva could potentially seek office if he himself is free of criminal charges by that point. Da Silva retains enough popular support that he could possibly make a credible run for re-election, either as a result of Temer's removal or in the presidential elections scheduled for 2018. Sustainability Network Party leader Marina Silva, a politician untouched by the Petrobras scandal, is also among the potential candidates for the presidency, holding up to 19 percent of the vote according to an April poll.
If Rousseff is impeached in the next few months, it is unlikely that a new administration will alleviate Brazil's wider economic problems. This is because economic growth in post-impeachment Brazil will still depend partly on commodity prices abroad. And then there are the economic ramifications of the Petrobras corruption scandal, along with deep-seated structural issues such as high transport costs and relatively uncompetitive domestic manufacturing. While market reactions to Rousseff's removal may be positive, restoring some balance to public finances will depend in large part on the result of congressional votes in the coming months. Brazil's economy is forecast to steadily rise out of recession in the years to come, with export growth largely driven by iron ore, specific manufacturing sectors, soybeans and other agricultural exports such as corn. Although Brazil's economy will likely improve slowly, failure to implement meaningful spending cuts in the months and years ahead will leave Brazil facing a significant burden, regardless of who is in power.