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10th MAY, 2016

Brazils new government

Brazils President, Dilma Rousseff, appears likely to lose her position this Wednesday
(May 11). The event would also mean the end of the Workers Party (PT)
administration, after leading the country for 13 years and 4 months. The probable
suspension of her term comes amid the combination of economic crisis the worst
since 1930 , political crisis, loss of allied parties support and allegations of PTs
and its allies involvement in an enormous corruption scheme surrounding statecontrolled oil company Petrobras, its contractors and politicians, uncovered by the
investigation Operao Lava Jato (Operation Car Wash).
Vice-President Michel Temer - a member of the Brazilian Democratic Movement Party
(PMDB) - has been working for some time now on the composition of his administration.
Temer, 75, is a lawyer specialized in Constitutional Law with a political career spanning
decades he served as federal representative for six terms and as secretary of public
security for the State of So Paulo. What is being articulated between his party and
possible allies is that his administration will do what it can, meaning it will attempt
to reverse the economic recession with a fiscal and political balance necessary for the
country to resume its path of growth and credibility.
At first, Dilma might be suspended for a period of up to 180 days, after the initial vote
on the impeachment process by the Senate on the 11th. It is expected that around
50 of the 81 senators will vote for accepting the beginning of the process, or 9 more
than the minimum necessary. After examining the process, the Senate will decide
whether the president should face trial. The vote will probably lead to a yes for her
impeachment. Therefore, the chances that the current president will come back to
office to finish her term are practically nil.

The process
has a political
character, by
not judging the
person, but the
performance of
the function, the
administrative
and political
responsibility

Vice-President Michel Temer


- a member of the Brazilian
Democratic Movement Party
(PMDB) - has been working
for some time now on the
composition of his administration

Dilma is accused of breaking Brazils fiscal responsibility


law after enacting six decrees without prior approval of
Congress in 2015 and authorizing illegal loan operations
using money from federal banks to fund Treasury-borne
programs, a practice of creative accounting that became
known as pedaladas. According to the impeachment
process rapporteur in Congress, the process has a
political character, by not judging the person, but the
performance of the function, the administrative and
political responsibility. Dilma, her party and allies say
that what is taking place is a coup. The president denies
any wrongdoing and says her administration has not yet
been judged by the Federal Budget Watchdog, or TCU.
Despite the different opinion between the supporters of
impeachment and those against it, with growing political
polarization among the population, the country has
been able to go through this process with its institutions
working and observing the Constitution. The Brazilian
Constitution provides for impeachment and establishes
that breaching the fiscal responsibility law is reasonable
ground for it. The Presidents removal is, of course, also
a political act. Dilma Rousseff does not have the support
that guarantees her governability, as she is politically
associated with the lack of control of public spending
and its consequences for the countrys economy.

Whats next
Dilma was elected in 2010 and re-elected in 2014 her
second term should end in 2018, but, her earlier removal
is deemed certain. Now, understanding Michel Temers
administration and the measures he will adopt is what
matters to the economic, social and political sectors. Temer
has always been Dilmas Vice President, but broke away
from the coalition when the impeachment process gained
more support from the population, the business community,
financial markets and the media.
At the moment, Temer has been indicating that his
measures will be more closely aligned to what the financial
markets and the production sector expect, in order to
regain the countrys growth. Such recovery is expected
to start at least from 2017, since, economically speaking,
2016 is practically lost.
The market readout indicates a GDP decline of 3.9%
industrial production should fall 5.83%, increasing the
accumulated negative growth in recent years. GDP growth
is forecasted at 0.3% for 2017, i.e. close to stagnation.
Inflation eased lately, but at the cost of exorbitant interest
rates (annual basic rate of 14.5%). Inflation should end the
year at about 6.9%, and is expected at 5.7% in 2017. The
unemployment rate reached 9.5% in the first quarter and

analysts forecast is that it should hit 12%, a scenario which


is unfamiliar to Brazil in recent times. Not long ago, when
the economy was prospering vigorously, the country had
achieved near full employment.
To provide credibility to his administration, it is quite
a consensus that Temers Minister of Finance will be
Henrique Meirelles, former president of the Central Bank
under President Luiz Incio Lula da Silvas term, Dilma
Rousseffs predecessor and also a member of PT (20032010). As on that occasion, Meirelles will be called to
calm the market. At that time, the strategy worked. The
former banker worked for more than two decades at Bank
Boston, where he was global president after serving as
president of the institution in Brazil. Meirelles has said that,
first and foremost, it is necessary to regain the countrys
confidence. The key aspect is the public debt trajectory.
Public debt reached 66.2% of GDP in 2015. If it goes any
higher, insolvency becomes a real risk.
Temer has been indicating that he does not intend to raise
taxes to cover the states debt. But there are doubts that
it will be possible to close the accounts without this rise,
even with the already high tax burden in the country. The
Vice President is also likely to carry on with the package of

concessions to the private sector especially airport concessions, a


process that was already started by President Dilma.
The current Vice President has shown his intentions to carry out tax
adjustments. Furthermore, he showed his support for political reform and
intentions to focus on a federal pact, giving greater autonomy to the states.
Regarding the exchange rate, the strong depreciation of the Brazilian
real in recent months had a positive impact on exporters, a breath of
fresh air among the turmoil that the country is going through. This
can be an important driver to reactivate the economy in the coming
months and Temer is expected not to change it.
Regarding the Central Bank, Temer has been an advocate for the
independence of the institution something that Dilma was firmly
against - and has said that its mission is not only to preserve the
value of the currency and create financial stability, but also to help
increase employment levels. Therefore, he promises to end the single
policy of raising interest rates to hold back inflation. People close to
Temer often says that the government is the state, the institutions,
and that governance is about managing the state, while governability
is expressed by the political support to exercise such administration.

Regarding the exchange rate,


the strong depreciation of
the Brazilian real in recent
months had a positive impact
on exporters, a breath of fresh
air among the turmoil that the
country is going through
In this short period of transition, from now until the new elections in
2018, Temer will administrate the government through governance,
meaning he will make concessions to achieve governability. To pass
his intentions in Congress, he has considered names for ministerial
positions who have more negotiating skills than they have a
remarkable profile for his ministry. Many of the appointed names are
experts in negotiating bills in the Congress.
In the social area, rumor has it that Temer will review the Bolsa
Famlia welfare program so that it mainly reaches the poorest 5%
of the population. Reforms to housing programs, also focusing on
the poorest in the population, should also be made. Making changes
in this area can cause people who lose their benefits to take to the
streets to protest. Social movements are likely to be bold during
Temers administration, as they are aligned to PTs government
plan. But without the financial support of Dilmas administration,
enthusiasm may subside due to a lack of sponsors.
Another significant change in Brazil will focus on international
alignment. The countrys foreign policy will no longer court countries like

Corruption
Dilma Rousseffs impeachment allegations do not include acts
of corruption. However, the issue is one of the main topics of
conversations among politicians and the population that supports
the interruption of her term. The reason is the ongoing Operation
Car Wash, which unveiled a multi-billion-dollar bribery scheme
between companies and political parties PT and others basically
using Petrobras, the state-controlled oil company.
Car Washs investigators have publicly said they expect that Dilmas
removal will not lead to an attempt by the new administration to
stop the investigation. It is expected that the corrupt politicians will
continue to be punished, facing incarceration, including most probably
the former speaker of the Lower House of Congress, Eduardo Cunha,
and the current speaker of the Senate, Renan Calheiros, as well as a list
of senators, businessmen and authorities that are under investigation.
Cunha and Renan are members of Temers party, PMDB. Last week,
on May 5, Cunha had his term cancelled as speaker of the Lower
House by order of the Federal Supreme Court.
Former president Lula, a founding member of PT and the most
important and emblematic figure of the party, is also on the
investigation list. The Public Prosecution of the state of So
Paulo has requested judge Sergio Moro, responsible for Car
Wash, for a pre-trial detention warrant for money laundering
and misrepresentation of assets. Lula is also being investigated
by Moro under Operation Car Wash. This indicates that Dilmas
upset may not be the only one PT will suffer this year.

Car Washs
investigators have
publicly said they do
not expect that Dilmas
removal will lead to an
attempt by the new
administration to stop
the investigation. It
is expected that the
corrupt politicians will
continue to be punished
Venezuela, Bolivia, Cuba and Ecuador, which
clearly follow a left wing administration
trend, or on South-South relationships.
To regain international relevance and
strengthen international trade, Brazil should
increase its integration with the United
States, Europe and Asia. Although the
country will remain part of the Mercosul,
the main destination for most of its exports,
especially manufactured goods, no efforts
should be expected to further develop the
bloc. On the contrary, the block will probably
operate more like a free trade zone than as a
customs union, its present status.

Paulo Andreoli

Chairman, MSLGROUP Latin America


President and CEO, MSLGROUP ANDREOLI

Claudia Mancini

Executive Director,
MSLGROUP Publicis Consultants

This article reflects the authors personal opinion