Brazil’s economy needs a saviour

Brazilian business leaders and the opposition count on looming impeachment of embattling President Dilma Rousseff, with hope to bail out the country from a deep recession to revive the sagging economy. The economic woes Brazil is experiencing and charges against Rousseff to have illegally manipulated public accounts in order to conceal a budget deficit during an election year, have combined to deal a huge blow that could cost her presidency.
Even Vice President Michel Temer, the leader of the Brazilian Democratic Movement Party (PMDB), who seeks to replace Rousseff, may be implicated in the multibillion-dollar bribery and kickback scandal at the state-owned oil company Petrobras. Rousseff has vowed to fight back against her foes to turn tables on them. If this political wrangling continues unchecked, it can throw the Brazilian economy in turmoil.
Figures are not on the side of Rousseff . The economy shrank 3.8 percent in 2015, the worst single annual fall in gross domestic product (GDP) since 1990, and the International Monetary Fund is forecasting the same drop this year and zero growth in 2017. Worse still, the public debt soared to 66.2 percent of GDP last year, a 10 percentage point jump from the previous year. The fiscal deficit more than tripled to 1.88 percent of GPD in 2015.
Meanwhile, three international ratings agencies have downgraded Brazil’s debt to junk status. Indeed, Temer would face abysmal economic figures that have worsened during the political standoff. To bail out Brazil economy from the recession, Temer warned that the country will have to make “sacrifices” to kickstart the economy and fix public finances.
Analysts expect Temer to pursue market-friendly policies if he becomes interim president. “Temer is likely to embark upon an ambitious economic reform agenda that puts pension and fiscal overhaul on the table,” international consultancy Eurasia wrote in a note on Monday. His new team should adopt structural economic reforms with the support of friendlier Congress, but the angry left led by furious Rousseff would likely do everything to make Tamer’s life more difficult.
When Rousseff’s administration tried in 2015 to pass cuts in social programmes and new taxes through Congress, the lawmakers did not approve them and the crisis deepened. Unions and leftist groups that have traditionally supported Rousseff’s Workers’ Party took to the street to protest against her bid to make cuts in social programmes last year. So it would be very difficult to pass reforms without reaching a consensus over the structural reforms among influential political parties in the country.
Even Temer, who would finish out Rousseff’s term in December 2018, may not go far in his reforms. It would be a political risk for an ambitious candidate to pursue radical reforms that could hurt livelihood of middle class and grassroots.
Temer was a part of Rousseff’s administration team, which squandered the fruits of the global commodity boom. So he will face huge challenges as the boom has turned to bust; public and private debt is growing too. Unemployment has almost doubled since Rousseff’s 2014 re-election.
If Rousseff is ousted, Temer needs to work with other market-friendly parties to spur growth. Earlier, his party proposed, among other things, bolstering the independence of the central bank, reducing the state’s role in the oil sector, and loosening various mandates that restrain the national budget.
Investors are optimistic about ousting of the leftist government, led by Rousseff. Anticipating the move, they piled into Brazilian assets this year on speculation Rousseff’s ouster will allow a new government to push through measures aimed at pulling Latin America’s biggest economy out of its worst recession in a century and tackling an exploding budget deficit. Yet, huge challenges are awaiting her likely successor. Temer has to work harder to forge an alliance that would allow him to reverse worst recession through the structural reforms and long-term strategies.