Brazil: will new Temer scandal derail fledging recovery?

1280px-Flag_of_BrazilOn the morning of May 17, just as Brazil was set to celebrate the news that it might finally be climbing out of its worst recession in its history, the country got slammed with a bombshell allegation that President Michel Temer was involved with a coverup and had condoned bribery payments made to a former congressional leader. Amid cries for Temer’s resignation, global markets fear the latest crisis can plunge the country back into recession, or at best, put the recovery on hold.

 

First the positive. Brazil’s Central Bank indicated Monday that the country might be returning to growth, and was “inching out of a two-year recession,” according to news service Mercopress.

 

The official gross domestic product (GDP) statistic is not published until June 1 but the bank issues a preview called the economic activity index. It showed 1.12% growth in the first quarter from the last quarter of 2016.

 

Conservative President Michel Temer’s government has been pushing through reforms to shrink the budget and bring finances under control. His centerpiece, raising the minimum retirement age, faces strong opposition but is considered crucial for recovery.

 

The Brazilian economy plunged by 3.8% in 2015 and 3.6% in 2016, the worst recession on record. This year GDP should grow overall by 0.5%, the government says. Unemployment remains at a record 13.7%, with more than 14 million people out of work.

 

New bribery crisis

Then, late on May 17, Sao Paulo’s O Globo newspaper reported that Temer was involved in an alleged cover-up involving Eduardo Cunha, the former head of Brazil’s lower house of congress. According to Bloomberg News, Cunha, who is currently in jail, is considered the force behind Dilma Rousseff’s impeachment last year. O Globo said a secret recording has emerged of Temer approving a payment to Cunha.

 

Cunha is in prison over multiple charges related to Brazil’s long-running corruption case centered around Petrobras, the state-controlled oil company. The Economist reports that the news has triggered a sell-off in Brazilian assets “as investors fret over the outcome of key pensions reforms needed to strengthen the public finances and, more broadly, the uncertainty that this brings to Brazil’s political and economic outlook.”

 

Comments on financial newscasts yesterday suggest that due to the allegations, Temer has lost the ability to negotiate. The government will need to reach a new political equilibrium before pension reforms can go forward, say the pundits.

 

 

Temer’s position is considered very precarious. During a national address on Thursday, May 18, he vigorously denied the charges and rejected calls for his resignation, saying he will the fight allegations.

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