Trouble in Brazil

March 29th, 2016  |  Source: Bloomberg

With President Dilma Rousseff of Brazil looking increasingly likely to face impeachment by early May, investors are turning their attention to the man who’d succeed her.

Michel Temer, the vice president, has plenty of traits that’d be welcomed in a country mired in a brutal recession. Those who know him best say he’s a business-friendly pragmatist who’s developed a knack over a multi-decade political career for forging agreements with fellow lawmakers. But then there’s this too: He runs the risk of getting forced out of office by charges related to the same impeachment case being brought against Rousseff. Temer’s PMDB party, the largest in the country, is widely expected to abandon the governing coalition at a meeting Tuesday.

In just over 30 years since its return to democracy, Brazil has looked to its vice president twice to pull itself out of crisis. Once it led to a debt default, the other time to the end of hyperinflation. Investors are wondering whether Temer will be more like Vice President Jose Sarney and his troubled economic plans of the 80s or Vice President Itamar Franco who laid the foundation for years of growth and stability in the 90s.

“There won’t be any miracles, but there’s more upside here -- I’m fairly optimistic,” said John Welch, an economist at Canadian Imperial Bank of Commerce and long-time Brazil watcher who believes Temer’s succession would be a good development. “He’s an aggregator like Itamar, a consensus builder, perhaps not to the extent the market wants but certainly much better than what we have now.”

With the largest budget deficit on record there won’t be much room for Temer to adopt fiscal stimulus measures. He would, however, act more effectively to control spending than Rousseff did, according to Thiago de Aragao, partner and director of strategy at political-risk consulting company Arko Advice.

Yet more importantly, Temer could boost investor confidence hovering near an all-time low with policies that would pull back a heavy government hand in the economy during 13 years of leftist Workers’ Party rule.

A policy paper Temer’s PMDB party issued in October argues that Brazil’s consumer-based growth engine has “run out of steam” and needs to be replaced by private investment and gains in competitiveness. It calls for a higher retirement age and an easing of the constitutional mandate for some spending so as to better allocate resources.

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