Brazil’s interim government faces many challenges, few solutions

Brazil’s interim government faces many challenges, few solutions
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Brazil’s new Interim President, Michel Temer, already incredibly unpopular, must now pull the economy out of a deep recession while pacifying a polarized nation.

Following the suspension of Dilma Rousseff, Brazil’s new interim president, Michel Temer, held his first official cabinet meeting. There, he pledged to stop the country’s economic free fall and reunite the nation.

It is a tough task, especially with the political turmoil the country faces. Although a highly cautious optimism is found with the arrival of a new economic team, the first actions of Mr. Temer and his cabinet show a disconcerting lack of understanding of, and possibly interest about, an already irascible public opinion.

Slightly promising news for the economy

Usually, an impeachment would scare foreign investors off and send the economy into collapse. With Rousseff’s removal, this was not the case. From day one, the new government has had the markets’ support.

Even before the new economic team was announced, market operators were already displaying contained optimism. In fact, the Brazilian real appreciated against the US dollar.

The Bovespa stock index consolidated its already unexpected good performance this year — up more than 15%.

If truth be told, this positive momentum derives from the absence of Ms. Rousseff rather than confidence in the future government. As reality kicks in, investors will be increasingly skeptical and attentive to Mr. Temer’s next moves. Volatility will likely remain for the next months.

Still, this good mood will give the new Ministry an invaluable head start.

The new economic team is highly knowledgeable and tested. The Finance Minister, Henrique Meirelles, is an experienced banker and former head of the Central Bank during former President Lula da Silva’s miracle years (2003-2010).

To lead the Bank, he appointed Ilan Goldfajn, another Wall Street darling. His nomination, universally praised, still has to be approved by the Senate — which is likely to happen by mid-June. Mr. Goldfajn, known for his orthodox affiliation, was the lead economist of Itaú, Brazil’s largest private bank, and has served twice as Central Bank’s economic policy chief.

The dynamic duo, along with a market-friendly lineup, will tackle the daunting task of dismantling an oversized state by driving the country towards a less interventionist direction. At the same time, it must tame growing inflation, double-digit unemployment, and an alarming budget deficit. Moody’s expects government debt to exceed 80% of GDP in three years.

Brazilian Debt; Temer

The Temer Administration faces a major deficit crisis as it arrives in office.

Thus, the new team is clearly qualified for the job, and has a vote of confidence from investors, politicians, and the majority of the public. In addition, Mr. Meirelles and his entourage will have the president’s carte blanche to propose the toughest changes. Yet, that won’t be enough, as they will deeply rely on the Congress and standard political give-and-take.

Mr. Temer’s is notorious for his horse-trading skills and has already engaged in patronage appointments to have a comfortable majority in Congress. Nevertheless, there are simply too many interests to accommodate, and the first signs of dissent are already visible. To make matters worse, the public has reacted with irritation to his archaic cabinet nominations, constant hesitation, and inappropriate comments by the appointees and the President himself.

A rocky start for Temer elsewhere

The first week of Mr. Temer’s interim presidency was a period to manage expectations, break promises, and rectify statements.

After vowing to unite the nation and pledging to end corruption on his first speech, Mr. Temer appointed an all-male, all white cabinet, something not seen since 1979 when Brazil was ruled by the military.

Furthermore, his team is filled with politicians accused of corruption and/or unfamiliar with their topics. Not surprisingly, the newly appointed Planning Minister, Romero Jucá, was forced to step down after eleven days in office. He was taped saying he would maneuver to obstruct corruption investigations.

Likewise, the largely controversial extinction of the Ministry of Culture, later reversed, had little effect on reducing expenses and — instead spurred negative reactions among the public opinion. Those decisions display Mr. Temer’s limited disposition for appeasement, which is bad news for the stabilization of the country.

Furthermore, he faces a serious legitimacy issue, as many see his rise to power as the product of a controversial process. He is also notably unpopular. Polls indicate that less than 2% would vote for him in a presidential election and 58% would approve his impeachment, which is already in progress. He was also recently linked to a gigantic graft scandal.

The economy is critical, but not a panacea

From his policies thus far, Mr. Temer has decided to ensure the country’s stability by fixing the economy first — a legitimate and logical approach considering the many constraints in place elsewhere. Nevertheless, he will have to address fundamental institutional problems and reform the deeply corrupted and dysfunctional political system. Misleading the public and media on this will quickly sour the good mood flowing from Ms. Rousseff ousting and undermine his fragile situation.

Add to this, the frenzy for the 2018 elections: Many potential candidates, looking for a place under the spotlight, are likely to cajole the president for privileged positions, banking on past favors. The already difficult task to satiate a coalition of around 10 parties will become increasingly complicated.

The opposition, which now includes Ms. Rousseff and her party, could explore this rift to weaken the interim government. Technically, she is suspended for 180 days pending the Senate’s final word. Her chances to be reinstated are minimal, but she won’t give up easily.

In short, the President relies too heavily on the success of his economic reforms and remains largely exposed to unnecessary contingencies, increasing the impact of a backlash if the former does not work. To retain the necessary support in Congress to pass his economic reform, Mr. Temer will avoid upsetting his coalition, keeping up the pork-barreling practices.

Ironically, this may well reduce the meager public support he has, exacerbate his legitimacy problems and jeopardize the said economic reform—a typical Brazilian Catch-22.

Categories: Latin America, Politics

About Author

Caio Pizetta Torres

CAIO PIZETTA TORRES currently serves as a senior advisor for the government of Rio de Janeiro within the department of International Relations. He has previously worked for the Brazilian Permanent Mission to the UN Office in Geneva. He has written extensively on international security and Brazilian foreign policy. Caio holds a master’s degree in Public International Law and International Organizations and a bachelor’s degree in International and European Law, both from Panthéon-Sorbonne University.