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Temer Corruption Allegations Unlikely to Impact Recovery

Temer may be investigated on charges of corruption for activities that took place before he assumed the post of Presidency. However, the news itself is unlikely to impact the recovery in Brazil. It faces other problems in the form of banks’ unwillingness to lend, with the only likely driver of economic recovery coming in the form of Central Bank rate cuts in the near term.

Nov 30, 2016 // 2:08PM

The leftist opposition is looking to have the incumbent President investigated and impeached for pressuring a former minister to approve a property development that benefitted one of his aides, according to multiple media reports.

There are now fears that this corruption scandal, on top of all the other investigations in connection with the car wash scandal, could impede the recovery of Brazil’s economy, which is currently experiencing its worst recession in over 80 years.

The political environment in Brazil has been weighing on growth, and businessmen have questioned the political strength of Temer to approve structural reforms.

In addition, there are concerns over the position the country’s Electoral Court will take on Temer’s mandate, and allegations of an illicit 2014 presidential campaign put forward by lawyers working for former President Dilma Rousseff.

However, according to Zeina Latif, Chief Economist at XP Investimentos, there is no schedule for the Electoral Court’s ruling, meaning that the base case is for Temer to see out his mandate until 2018.

“As long as Temer succeeds in stabilising the economy, the Electoral Court will not threaten his mandate.”

She added that the risk of an impeachment process was very low.

Although Temer appears unlikely to be impeached, the scale and pace of a Brazilian economic recovery is still uncertain. Analysts predict that it would only be feasible during the second half of 2017, although this is wholly dependent on the ability of the country’s Central Bank to cut interest rates.

“There is no other cyclical growth driver available [for a recovery]. World trade is stagnant and there is no room for fiscal stimulus, which would be counterproductive due to its impact on the country’s debt-to-GDP ratio, and therefore confidence in its economy,” Latif noted.

Banco do Brasil did lower its benchmark SELIC rate by 25bp to 14% on October 19, the first time the Central Bank moved rates since August last year, and the first cut in 4 years. The country’s public debt-to-GDP reached 58.91% in 2014.

“Whilst the microeconomic agenda for stimulating the country’s growth potential is not operational, I see room for Banco do Brasil to accelerate the easing pace, but so far the monetary authority looks more hawkish.”

Overall, the corruption probe into Temer is not expected to hold up the President’s proposal for a 20-year ceiling on federal spending. Although this may be the centrepiece of Temer’s plan to restore fiscal discipline and reign in the budget deficit, which equalled 10.4% of GDP in 2015, investments are still likely to suffer.

“Bank lending has collapsed, tightening monetary conditions are at record levels and companies are struggling with difficult financial conditions. It is not all about corruption,” she concluded.

Americas Macro Brazil

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