Course Correcting Amid Brazil’s Political Crisis: Key Actions for Multinationals

FSG will be hosting a webinar to share our view on the Brazilian market, and create alignment on the key actions to take to protect sales and profitability. The webinar will be held live on Wednesday, June 7 at 8am EST with moderation by FSG’s Senior Analyst for Brazil, Alec Lee. To register, please click here.


News on May 17th of a recording of Brazil’s President Michel Temer allegedly discussing hush money for jailed Congressman Eduardo Cunha threw the market into turmoil. In the days following, the local stock market gave up billions of dollars in value while the currency depreciated by nearly 10%.  While the event pushed  us closer to FSG’s downside scenario for the Brazilian economy (which includes a failed pension reform and president Temer being removed from office), the ultimate consequences of the May 17th revelations remain unclear.

Today, the most likely continues to be for President Temer to either step down or be removed from office (should the recording truly exist). However,  it is FSG’s view that there remains a high likelihood that the new government would complete the unfinished task of reforming the country’s broken pension system (see below), thus still setting Brazil on a growth path through 2018 and beyond.

What will happen to Temer?

Assuming that the recording is true to the released transcript (it has yet to be made public), and that there is no other plausible explanation given by President Temer, FSG believes it will be very challenging for the president to finish his mandate which runs through October 2018. That leaves the country with several options, with the ultimate outcome being determined by a mix of political forces and personal decisions by Temer himself.

  • Finishes mandate (20%): Temer, could in theory still finish his mandate. However, it has now become nearly impossible for him to complete his key reform proposals (including labor and pension reform) that are critical for driving higher growth and thus maintaining political support for the current government
  • Resign (10%): Temer could also choose to resign, helping to ensure that his key reform measures, which have made great progress and are close to key votes, would be able to continue their path through the legislative body as soon as possible. However, resignation would effectively remove the legal protections that Temer now enjoys as the chief executive
  • Have mandate canceled by Supreme Electoral Court (TSE) (40%): The most likely outcome is for Temer to be removed by the TSE, which had already scheduled to hear a case against the Dilma/Temer 2014 campaign for illegal financing beginning on June 6th. Before the revelations of last night (May 17th) it was widely believed that Temer would survive this trial, however, the recent revelation have clearly turned the tide against him
  • Impeachment (15%): The lowest probability outcome is for impeachment. While the opposition parties have already called for an impeachment process, it would need to be accepted by the current Chamber of Deputies President (Rodrigo Maia), while Temer would only need the backing of 179 deputies to avoid a vote against him (a number that he can likely still muster
  • Indicted and removed by Supreme Court (15%)

If Temer is gone, who would become president?

While how Temer might leave or be removed from office is a key short-term question, the ultimate impact of last night’s events will be determined by who ultimately ends up in the presidential seat, which would be decided by either indirect or direct elections.

No matter how Temer leaves office (if he does), Rodrigo Maia (the president of the lower house) is currently tabbed to succeed him while either indirect or direct elections are convened.

  • Indirect elections (50%): Should Temer resign or be impeached, the interim president (likely to be Rodrigo Maia) would have 30 days to call for indirect elections by Congress. Congress can select any Brazilian that still maintains their political rights, and that has not held a position in the executive branch, the judiciary, or the public prosecutor during the last 6 months to become president and finish the current mandate that runs through October 2018. That leaves us with names such as Luiz Inacio Lula da Silva (former president), Fernando Henrique Cardoso (former president), and Rodrigo Maia himself, among others
  • Direct elections (30%): Direct elections could be held with a constitutional amendment (308 votes necessary), the cancelation of Michel Temer’s mandate via the TSE, or a decision by the Supreme Court (the TSE). At this time, it is unlikely that the center and center right parties would support this option as it would create a clear path for former president Luiz Inacio Lula de Silva (Workers’ Party) to return to the presidency, though the option should not be ruled out. The main factor to be considered here will be the extent of popular pressure in the streets for direct elections

What will happen to the reforms in progress?

The reform measures (principally labor reform and pension reform) are unlikely to be discarded with the current president. Rather, FSG interprets these events as likely delaying even further the ultimate passage of these reforms (which were within just weeks of key votes) until a new political order can be had in Brasilia.

Impact on doing business in Brazil?

This event no doubt will drive a spike in market uncertainty in the short term. However, the two key threats to market recovery (fiscal reform in the form of pension reform is not passed, and a president that would implement destabilizing populist measures wins an election and is established for a four-year term) are not yet guaranteed to materialize.

  • Currency markets: the real is likely to take a strong hit, depreciating by 5-15% until greater clarity is had around the ultimate outcome
  • Local investment: local companies are likely to freeze new investments, while bank spreads are likely to climb thus squeezing the finances of small and medium sized businesses (the very businesses that had been the main creators of new jobs in the April jobs report)
  • Consumer spending: While consumer spending was already expected to remain weak through 2017, expect consumers to pull back on purchases of non-essential in the short term while becoming more price sensitive when purchasing even essential items

Multinationals operating in Brazil will need to survey their own risks to the potential outcomes and consequences, considering both currency fluctuations in the short-term as well as the potential medium-term outcomes for growth in the market.


Shortly following these revelations, FSG provided clients with an updated GDP forecasts and scenarios to help in the assessment of risk and drive internal alignment.

Not a client? You can access the document by filling out the form below:

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