On Sunday (April 17th) Brazil’s lower house voted (367 votes for vs. 137 against) to approve a request for the impeachment of President Dilma Rousseff. The vote essentially sends the process to the Senate, where a simple majority will be needed to actually open an impeachment trial against the president.
In regards to timing, FSG expects the Senate to vote on whether to open an impeachment trial by the middle of May. Assuming the impeachment trial is installed, which is FSG’s base case, the expectation is for the judgment to begin sometime between June and August, with the trial itself likely lasting several days at a minimum, or potentially extending through the end of the year. Should the Senate vote to open the process, Dilma will be removed from the presidency for 180 days, being replaced by Michel Temer. If Dilma is ultimately convicted then Temer would theoretically stay in the presidency through 2018.
Significance for business operations
Although markets have reacted positively to the forward progress toward eventual installation of impeachment proceedings against President Rousseff, it is important to emphasize that the next months will be marked by continued uncertainty and volatility in terms of both the value of the Brazilian real and overall market confidence. Here are the reasons why:
- Prior to the installment of an impeachment trial, we expect at least a two-week period in which President Rousseff is essentially a lame duck and in which Vice President Temer has not officially claimed the powers of the presidency, thus leaving the country in a state of flux. FSG believes it to be unlikely that Brazil could create a pathway forward that does not involve impeachment and the rise of Vice President Temer, or the ultimate return of President Rousseff.
- Following the eventual installment of the impeachment trial there will still exist the possibility that President Rousseff is not convicted and permanently removed. That said, the best outcome for the economy would be if the president were to resign (as was the case of Fernando Collor de Mello in 1992), or if the process would be conducted quickly. In the current environment neither case is very likely, as Dilma has stated she will not resign and FSG believes that Renan Calheiros (PMDB – AL), President of the Senate and intra-party rival of Vice President Michel Temer, is likely to enact considerable delays in the process. In this case, and with the continued possibility that the President could eventually return, the new Temer government would struggle to create a coalition in Congress strong enough to pass constitutional reform.
- Once the president is convicted and permanently removed, the Temer government would still face threats on various fronts that would make achieving significant reform difficult. First, there is an open process in the lower house for the impeachment of Temer himself, though FSG believes it unlikely that there will be enough support to sustain this movement. Furthermore, the Temer government would continue to confront the possibility of having the Federal Electoral Court end the president’s mandate for illegal campaign financing in 2014. And finally, Temer and the PMDB in general are poorly perceived by the Brazilian electorate, with Data Folha having determined that 54% of those that gathered on Paulista Avenue in support of impeachment on Sunday also support the impeachment of the Vice President (Temer). Ultimately then, the Temer government would need to build a new coalition in Congress while confronting various threats to its mandate, all while lacking broad-based popular support and electoral legitimacy. Both factors will make dealing with Brazil’s smaller parties, which will be key to passing key constitutional reforms, even more difficult.
The light at the end of the tunnel
This subdued forecast regarding the potential of a new Temer government leads FSG to believe that Brazil will still need to await presidential elections in 2018 in order to see the return of moderate growth. Only with a credible political solution, and consequent fiscal adjustment (somewhat independent of degree), will Brazil be able to drive renewed investment expansion and the return of jobs. However, the current rejection rates of possible candidates make the political outlook for 2018 uncertain:
- The PMDB and Michel Temer (likelihood: 15%) will likely find it very challenging to come out on top in 2018’s elections, as it will be necessary to show significant progress in terms of economic growth while also shaking off the stain of corruption and the perception of a party unable to elect a president (the PMDB has historically played the role of government coalition partner, taking a more opportunistic stance to advance its vague policy goals)
- Former President Lula (likelihood: 15%) could still provide a chance for the PT as elections are currently 28 months away, providing the party time to turn the tables. However, for this to occur it will be necessary for Lula to be cleared of corruption charges, and for a new Temer government to fail in its intended adjustment program
- The PSDB (likelihood: 40%) is still the party to beat for 2018 despite not having a defined candidate. The party of Fernando Henrique Cardoso (responsible for the real plan and inflation targeting) claims the ability to renew Brazil’s macroeconomic stability, and has the political machine in place to elect a president. However, it also has its own public perception issues related to corruption
- A third party candidate (e.g. Marina Silva) (likelihood: 30%) could potentially rise to win the presidency, though would still need to form a coalition with Brazil’s long-standing major parties, and would in all likelihood be committed to significant macroeconomic reform
Actions to take now
In the short run, it will be important to continue following political developments to understand when the economy will see renewed investor and consumer confidence, and a consequent recovery in domestic demand. Key signposts to watch will include: (i) the development of a strong political coalition in the first weeks of a new Michel Temer government that would allow for much-needed reforms; (ii) developments from the Supreme Electoral Court that would eventually end a Temer government; (iii) progress in the investigation against former President Lula; and (iv) the appearance of a viable PSDB candidate to run in the 2018 presidential elections.
Multinationals should continue to guard against currency volatility and work to lay the groundwork for a return to moderate headline growth in 2018 and quicker expansion over the medium- and long-term. As Brazil is unlikely to see the same growth dynamics as it did in the past ten years, companies should be looking to become more granular in their approach to Brazil. FSG suggests building greater knowledge now of the drivers of growth at the subnational level, including government financial dynamics and customer pockets that will be more resilient, while also adapting channel structures to make getting goods to market more cost-effective and adaptable to economic downturns.