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Brazil: Temer’s Responsibility

Since the economy is affected by expectations, the perception of change is already producing alleviation in the financial market, after the stress experienced last year and the start of this year, when the markets envisioned a rising likelihood that the Rousseff administration would lose control of inflation, or even default on the sovereign debt.

Pressure from the financial market, unlike Dilma appeared to believe, is not neutral for the economy. Rather, it affects the conditions in the credit and capital markets as well as the financial situation of firms and households, with repercussions on the economy as a whole. Therefore, the current sigh of relief can be the first step to lift the country out of the crisis.

The expectation of the fiscal adjustment, however, needs to be confirmed, through delivery of the reforms promised by the government, so that this benign movement in the financial market can be more than just a “hiccup”, and really bring improvement to the economy. For now, there is a chasm between the good humour of the financial market and the continuing pessimism of business executives and consumers, despite the recent improvement of the confidence indexes.

Brazil needs to return to normalcy, by overcoming the fiscal crisis and reducing inflation to somewhere near the target, so that economic activity can rebound. This is Temer’s mission. There is no time or political conditions for a more ambitious agenda in the next two years.

All the same, his mission is by no means easy. He needs to put the Brazilian economy back on track to advance later, or build a “bridge to the future”, to enable discussion of a progressive agenda, with reassessment of the government’s role in the economy, strengthening of institutions, greater opening to trade and progress in social indicators. But debate over these matters is not possible before stabilizing the economy.

The return of normalcy will be the central element for political stabilization, meaning a society that does not regret supporting impeachment and a responsible election campaign in 2018, with honest debate about proposals for the country, unlike the embarrassing campaign in 2014, when misdirection and lack of preparation held sway.

If Temer stumbles, failing to recover public trust and social well-being, with inflation and unemployment at civilized levels, the future development agenda will once again be delayed or even lose ground, threatening social indicators and widening the abyss between Brazil and the world.

The chances for the Temer government to build this bridge appear good. The exit of Dilma, whose ascension appears to have been an accident in the country’s political history, does not guarantee Temer’s success, but it does make a difference, by reducing the risk of Brazil’s collapse.

The economic debate is more mature and society, more participative, is anxious for change. It remains to be seen whether the government will be courageous as well as pragmatic.

If Temer is successful, the country’s ability to react can be surprising, although not in the short run due to the gravity of the crisis. Healing the wounds will take more time.

The next steps need to be firm, so the country can rebuild the musculature lost and not fall again. The impeachment decision is historic, as will be the choice for the necessary adjustment that will lead Brazil to a democratic and honest discussion of the country’s future bearings.

Americas Macro Policy & Government

Zeina Latif is chief economist at XP Investments. She holds master and doctorate degrees in Economics at University of Sao Paulo (USP).

Previously she worked at Royal Bank of Scotland as senior economist for Latin America, and ING, ABN Amro and HSBC Asset as chief economist for Brazil.

She is columnist at the newspaper Estado de São Paulo and she is counselor at the Social and Economic Development Council of the Republic Presidency.

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