Brazil Gets a New President. What’s Next?

˙ Voces

Brazil is going through its worst national trauma in recent memory—brought on by a deep economic reversal that, as of yet, has no end in sight, massive corruption scandals involving many senior political leaders and top business executives, and declining confidence in the nation’s governing institutions. With her impeachment trial now accepted by the Senate, President Dilma Rousseff  has been forced to leave office until the trial concludes in approximately six months. Vice President Michel Temer has assumed the presidency on an interim basis, and will serve out her term if the Senate confirms the charges against Rousseff. This, of course, will not necessarily end Brazil’s trauma. That depends on the Temer government’s performance, particularly its success in laying the groundwork for reviving the country’s moribund economy.

What will be the outcome of the impeachment process? Who will end up as president of Brazil when it is all over? 

It is widely expected that Rousseff will, in fact, be impeached by the Senate and be removed from the presidency permanently. Temer will likely continue as president until the end of her term on January 1, 2019. As things now stand, Temer could run for president in the 2018 elections, but he has declared that he will not do so. There are, however, other possible scenarios, but they all remained far-fetched  at this point.

Rousseff could  survive the impeachment trial and return to the presidency, but that is highly unlikely given the mood in the country and votes so far in congress. Temer himself could be impeached and replaced by a new, yet to be selected head of the chamber of deputies. Or by virtue of a constitutional amendment or decision of Brazil’s supreme electoral court,  new elections could be scheduled, but that option has yet to gain much support.

Does the Temer administration have the legitimacy needed to govern effectively?

One key determinant of the new government’s legitimacy is the whether the impeachment process follows Brazil’s constitutional requirements. Although supporters of the Rousseff government, both inside and outside of Brazil, have denounced her ouster as unlawful, a virtual coup d’état, the fact is that so far it has met the demands of the constitution regarding charges, procedures, and timetables. Moreover, it  has been overseen by the country’s highest courts, which are regarded as the most credible and competent of Brazil’s national institutions.

Still, although on sound legal grounds, the impeachment process is not without blemishes. One is that the charges against Rousseff are flimsy. She was not accused of a criminal act, or illicit personal enrichment. Instead, she was charged with misusing her power to hide budget shortfalls with state bank loans, a practice often used by previous presidents. Rousseff’s punishment, many feel, was disproportionate to the crime.

A second weakness was that the impeachment, although under judicial supervision, has been managed by corrupt congressional leaders facing criminal charges. Just after the House approved the impeachment, Speaker Eduardo Cunha was criminally indicted and expelled from congress. His replacement, who tried and failed to revoke the impeachment decision, is under investigation in the Petrobras scandal—as is the leader of the senate, Renan Calheiros.  Interim President Temer himself is also a target of investigation. 

The debate over the legitimacy of Rousseff’s removal from power is, at its core, grounded in politics and ideology. While formally and legitimately charged with manipulating fiscal accounts, Rousseff’s impeachment was mostly the consequence of Brazil’s steep economic decline, the unraveling of the Petrobras scandal on her watch, and her broader governance failures. For her entire second term, her approval rating hovered around ten percent. More than 60 percent of Brazilians wanted her impeached.

Although Temer may be even less popular than his predecessor, he starts off with some advantages. Probably the most important is that he is not Rousseff, who became a potent symbol of Brazil’s failings. For the time, most Brazilians seem willing to offer Temer and his advisors a chance to address the country’s problems. The promised resistance of Rousseff’s Workers’ Party (still the second largest in congress) to the Temer government has so far not been particularly forceful. Demonstrations and protests have been smaller than expected.   

President Temer’s 22 cabinet choices present a mixed picture. They are a politically and regionally diverse group, drawn from nine different political parties and almost every part of the nation. As a group, however, they do not fully meet Temer’s pledge to build a government of “national salvation” or “national unity.”  The cabinet has already been widely criticized because it includes no women or persons of color (although a majority of the Brazilian population is Afro-descendant). Moreover, almost all of the ministers are professional politicians, and nearly half of them have in some way been linked to the Petrobras scandal.

Interim President Michel Temer holds the first meeting with his new cabinet. May 13, 2016.

Overall the cabinet is a politically adept group with considerable legislative experience, which will be essential for Temer to move his program forward. But it is technically weak in many critical areas.   

Two of Temer’s key ministers are worth special mention because they bring exceptional competence and experience to their new posts.  The most important figure in the new government, the minister of finance, will be Henrique Meirelles, the former CEO of the Bank of Boston.  He is not only highly regarded by the  business and banking sectors in Brazil and worldwide, but he has also earned the trust of the Workers’ Party and others on the left, having served as central bank president for the full two terms of Luiz Inacio Lula da Silva. With Meirelles’ appointment, Temer has forcefully signaled his intention to pursue a serious program of economic adjustment and fiscal reform.

Temer’s second outstanding ministerial appointment is Senator Jose Serra, now  Brazil’s minister of  foreign affairs—with responsibility for foreign trade policy. Twice runner-up in presidential elections, Serra has served as former governor of the State of São Paulo and mayor of the City of São Paulo. During the administration of Fernando Henrique Cardoso, he served first as minister of planning and later as minister of health.

What does the Temer government have to do to firmly establish its credibility, gain the support of a skeptical public, and secure effective cooperation from a fractious Congress? What opposition is it likely to face in the coming months, from the partisans of Rousseff and others? Can the new Temer administration secure needed congressional approval for an adjustment and growth program that will begin to rebuild the Brazilian economy—or will political resistance continue to obstruct economic reform? How will the new government’s performance be affected by the ongoing corruption investigations and trials? 

The new Temer government’s greatest challenge in the next month or so  is to establish confidence in its economic management and policy—within Brazil’s  corporate and financial communities, among foreign investors, and broadly among the general public. The appointment of Henrique Meirelles to run the country’s finances was a powerful first step. He has already announced his initial directions: to reduce government spending, curtail the flow of special benefit to the private sector (including tax breaks, government subsidies and the like), and begin to address several continuing fiscal problems like Brazil’s overly generous pension systems.

The objectives are clear—to bring the fiscal accounts into balance, get  inflation under control,  open the way for  lower interest rates, shore up the Real, Brazil’s national currency, and encourage the foreign and domestic investment needed to restore growth and raise employment.  And he will seek to accomplish all of this without seriously reducing Brazil’s transfer programs for the very poor, which have helped to lift so many out of poverty, or compromising  public services. No one expects Brazil’s recovery from its prolonged economic slump to be quick or easy, but the government needs to show some visible progress.

Global factors will, of course, have their independent, hard-to-predict impact on Brazil’s economic prospects. Mediocre growth worldwide could, as it has for the past several years, keep a damper on the prices of and demand for Brazil’s commodity exports—including iron ore, steel, and oil as well as its huge agricultural production. Rising interest rates in the US could reduce lending to and investment in Brazil.

But, Brazil still has some residual strengths. Its banking system, according to most observers, is in an exceptionally strong position. In recent years, it has been conservative in its lending and maintained sizable capital assets. There is no banking crisis on the horizon  or the need for an expensive government bailout. The country has also built up a substantial foreign currency reserve. Accordingly, there is little danger that Brazil will default on its international obligations, despite the junk bond rating it has received from the global credit agencies. Domestic debt is another matter, however.  It has spiraled upward as once low interest rates have risen rapidly  and tax revenues have fallen sharply with the country’s continuing deep recession.

Meirelles and his team know what  policy changes are needed to reinvigorate the Brazilian economy and overcome the multiple obstacles to growth. The minister,   from his years in congress and the Central Bank, has a reliable sense of the political and legislative impediments to adjustment measures. Moreover, barring any unexpected reversals, the political moment should favor the Temer government, which most Brazilians want to see succeed, regardless of their reservations about the president himself.

To be sure, the task will not be easy.  No one will be happy to receive fewer benefits, see their budgets cut, or pay additional taxes—yet that is what will have to take place. The Workers’ Party,  galvanized by Rousseff’s ouster and seeking to demonstrate its continuing force, will stand vehemently against  the new administration’s economic program, regardless of its design. Nationwide  municipal elections scheduled for October  will be a closely watched  gauge of the electorate’s reaction to the Temer government and the relative strength of different parties. The elections, just four months from now,  will be hotly contested and could limit the speed and depth of the economic reforms that can secure congressional approval. And battles over budgets, expenditures, and taxes  will be occurring in the shadow of the ongoing impeachment process.

It is almost always a perilous task to make predictions about the course of a country’s  politics or economic policy directions. In Brazil today, it is harder than ever given the nation’s economic tumult and political upheaval. Yet, there are reasons for careful optimism—including the combination of a top rank, highly respected minister of finance, an experienced political team managing the presidency, and the Brazilian public’s likely accommodation for a new president. One particularly hard-to-assess uncertainty is how the multiple corruption investigations and trials now underway will affect public attitudes and political decisions. President Temer himself might face charges at some point. One or more of his cabinet ministers could be indicted even sooner. Temer’s party is already widely viewed as corrupted. Although Temer has vowed to protect the integrity of the Petrobras kickback and bribery investigations, questions are being raised about whether his  government will, in fact,  seek to limit them in some way or another, to shield party  members and allies. If that were to happen, the new administration could face a harsh reaction from an already angry and frustrated electorate.

Two other high profile challenges—the Zika virus epidemic, which the World Health Organization has declared a global health emergency, and the International Olympic Games scheduled this August—are not expected to generate special difficulties for the government.  Brazil today has largely completed preparations for the Games. Ironically, if all goes well, they may provide a boost for Temer, while the Rousseff Administration will likely take the blame for any serious mishaps. She will probably also be held responsible for unforeseen or  newly arising problems from the Zika virus—although Temer could draw criticism for his appointment of a health minister with only limited experience in either medicine or health.

How will the turmoil affect Brazil’s regional and international agenda? What changes can be expected in trade and commercial policies, in diplomatic relations? 

Although foreign policy is  now in the hands of an unusually able, hard-driving, and self-assured  leader, dramatic changes in Brazil’s overseas agenda are unlikely—particularly while Rousseff’s future is undecided and  Temer presidency  is not yet permanent. Moreover, regardless of the government in power, Brazil  has long sustained a highly consistent foreign agenda, which assigns high priority to cordial, peaceful  relations with other nations and mutual non- interference in internal affairs.  

To be sure, diplomatic ties with Latin America’s half-dozen  populist, anti-US regimes have already frayed, as many have joined Rousseff’s defenders in questioning both the legality and legitimacy of the impeachment process and the new Brazilian government. They regularly refer to Rousseff’s removal as a coup d’état, and some have called for sanctions. Relations are likely to remain cool, even strained for a while.

There has been little or no visible change in bilateral  relationships with other Latin American nations, including Argentina, Colombia, Chile, Peru, and Mexico, and none should be expected. But Brazil’s influence in regional affairs  has clearly waned, and the country no longer plays much of a leadership role. US-Brazilian relations remain unchanged as well. The US has stayed on the sidelines for some time, letting the Brazilians work through their political and economic tumult. As several officials have said, Washington does not  have the  instruments to help or influence Brazil very much.

In light of its diminished economic and political circumstances,  Brazil has judiciously been keeping a rather low profile in world affairs. Paradoxically at time when the Olympics and the battle against Zika are bringing the world’s spotlight to Brazil, the country is focusing its attention mainly on domestic matters.

It is on the foreign trade and investment fronts that Brazil may alter its policies. Brazilians know that, to restore growth and recover economic dynamism, their country needs to export more and mobilize larger flows of foreign lending and investment. Protectionist barriers of various sorts are likely to be loosened, including some of the special burdens placed on foreign firms. Brazilians also seem to be  rethinking the value of trade agreements, which successive governments have avoided for two decades. Remaking the dysfunctional Mercosul Common Market, completing long deferred negotiations to join Mercosul in a commercial accord with Europe, and establishing  some form of  association with the more dynamic Pacific Alliance trade pact are all ideas that may be pursued.

Brazil’s economic downturn and corruption scandals have badly damaged and weakened many of the country’s most important companies, whether of public, private, or mixed ownership. But most of them have retained a strong technical and financial expertise, and should be able to rebuild their balance sheets and reputations. The fall in the Brazilian Real this past year has already been attracting new investments from North America, Europe and Asia.

Over the longer term, Brazil will almost surely emerge from it current crises and remain one of  the largest markets and sources of commodities in the world, and the gateway to the South American market. Concern should focus on how long the country’s economic downturn and political turmoil will last—and when recovery will be firmly underway.  It is reasonable to expect some substantial improvement on all fronts in the next year or two, but there can be no guarantees of progress. Everyone doing business or diplomacy in the country needs to keep a close watch on political and economic events in Brazil.