July 2016

Brazil’s interim President Michel Temer (PMDB) will open the 2016 Olympic Games at Rio de Janeiro’s Maracanã Stadium Friday, August 5th . His message to the world will be one of confidence in Brazil’s economic and political future and a portrayal of Brazil’s readiness to return to the global stage. Temer is a big market favorite.  The Brazilian financial market has rallied tremendously since May, when he assumed the presidency, following the vote to begin the impeachment process against President Dilma Rousseff. 

The Brazilian real appreciated 21 percent in 2016 and the Ibovespa stock index is up 31 percent. Analysts surveyed by the central bank expect the economy to grow more than 1 percent in 2017 after significant contractions through 2015 and 2016. Brazilian assets are outperforming expectations based on optimism that Temer’s administration will win over investors.

Temer’s economic team is in favor of a series of market-friendly policies and plans to rein in the high budget deficit. The platform includes auctioning licenses to improve infrastructure, selling state assets to boost revenue, curbing pension payouts, and deregulating the labor market. Brazil's Congress recently approved Temer’s central bank nominations and revisions to this year’s budget target, and he hopes to obtain approval for a constitutional reform that would cap government spending.

Temer’s positions are expected to be bolstered by the conclusion of the impeachment proceedings against President Dilma Rousseff (PT). The impeachment process and trial are expected to conclude by the end of August 2016 in advance of the G20 summit (scheduled for September 4-5 in China), solidifying Temer’s position and legitimacy to push for broad economic reforms.  Furthermore, the recent election of Rodrigo Maia, an economist in the right-leaning Democrats party (DEM), as the new speaker of Brazil’s lower house of Congress, the Camara Federal, is a critical victory for Temer. Maia has indicated that he is supportive of a number of the interim Administration’s economic measures and will make economic reforms the priority of the lower house agenda. 

However, despite recent positive market sentiment in Brazil, the country is still facing a period of political and economic instability that threatens to overshadow the 2016 Olympic Games starting this week. The deep recession, a massive corruption scandal, and dysfunctional politics creates a perfect storm amid concerns about security, the Zika virus, and the potential for a weak, lame duck administration given Temer’s unpopularity with the Brazilian electorate. His centrist party, the PMDB, is implicated in a number of corruption scandals. Three members of his cabinet have resigned because of allegations of corruption. The former president of the lower house who led the drive against Rousseff, Eduardo Cunha (PMDB), was forced to step down because of bribery allegations.

It remains to be seen whether Temer can pull the country out of its fifth consecutive quarter in a recession. Temer’s promises to implement austerity measures and jumpstart the economy are weakened by the crippling recession and doubts over the approval of large structural reforms due to upcoming municipal elections in October 2016, as well as political uncertainty and lower commodity prices that may create a lag in the reform process.