Only a day after Brazil’s main statistical agency released economic data for Q3, which showed the largest year over year contraction in more than 80 years, the country was shocked by the decision of Eduardo Cunha (PMDB), president of the Chamber of Deputies, to permit a vote on the possible impeachment of the president. The event is sure to rattle an already shaken Brazilian economy, and is likely to have profound effects on the forward direction of growth in the country.

Unfolding of events:

• On Oct. 7, the Federal Accounting Tribunal (TCU in its Portuguese acronym) voted to reject the Rousseff administration’s 2014 fiscal accounts. Its justification, as cited in its official report, included the government’s funding of operations via public sector banks, which is a direct violation of Brazil’s fiscal responsibility law
• In the following days a flurry of requests for impeachment were filed, in which the TCU’s opinion was leveraged to provide legal justification
• As president of the Chamber of Deputies, Eduardo Cunha had the last say as to whether to accept or reject these requests. Under investigation for corruption, Cunha chose to leverage this fact in an attempt to bargain for his own political survival
• On Wednesday (Dec. 2) afternoon in Brazil, members from President Rousseff’s party (the PT) participating in the special commission assigned to decide on Cunha’s fate aligned themselves against the federal deputy
• Only hours after the announcement that he would not be receiving support from the PT, Cunha chose to accept what many consider as the most complete request for impeachment, thus beginning a process that will likely result in a vote by the complete Chamber of Deputies respecting whether to open an impeachment proceeding against the President

Now what?

• A special commission will be put together in the Chamber of Deputies, and will be tasked with emitting an opinion on the impeachment request to be sent to the whole body. A vote composing a simple majority will be needed in the commission (composed of 65 members) to move forward with the process
• President Rousseff will have 10 sessions of Congress to present her defense
• Upon receiving the opinion of the special commission (assuming the commission does not reject the measure), the full chamber of deputies will then vote on whether to open an impeachment process. To pass, the measure will require a two-thirds majority (342 votes)
• If passed, President Rousseff would be removed from office for 180 days while an impeachment process is carried out in the Senate. Michel Temer (PMDB), the current vice-president, would become the acting president
• An impeachment proceeding would then be carried out in the Senate and would be presided over by the President of Brazil’s Supreme Court. The ultimate decision on whether to remove the president would be left to the senators, requiring another majority vote of two-thirds (52 votes)
• If the Senate were to convict the president of wrongdoing she would be permanently removed from office and her political rights would be suspended for eight years. In such case, Michel Temer would complete the current mandate which runs through 2018

An initial decision by the special committee to move forward with a vote by the whole Chamber of Deputies should be expect by January or February. If the commission elects to continue with the process, a vote in the full Chamber of Deputies would be expected to occur within a period of a month. Finally, if the Chamber of Deputies selects to open an impeachment process in the Senate, the proceedings would start nearly immediately and could run through June/Aug. of 2016 with a final decision on the President’s fate expected at that time.

Scenarios:

• Chamber of Deputies fails to open impeachment process (40% likelihood): There are still significant political questions surrounding the ability of the opposition to obtain a majority of two-thirds (342 votes). The opposition had stated publicly that they had 280 votes, but this still leaves them short by 62 votes. With a recent split in the PMDB, it is unclear how many votes Cunha would be able to bring to the table. Likewise, because of Cunha’s role in the process and the outstanding accusation of corruption against him, many deputies may perceive the vote as illegitimate and choose to withhold their support.

• The Chamber of Deputies votes to open impeachment process and Senate convicts the President (55% likelihood): Notwithstanding the challenges that opposition would face to garner enough votes for an impeachment, FSG believes that already high and rising popular discontent could be enough to allow the opposition to achieve the necessary two-thirds majority in Congress. President Rousseff’s current disapproval rating stands at 67%, only one percentage point below the disapproval rating of Fernando Collor de Mello on the eve of his impeachment in 1992. More importantly, 65% of Brazilians support the actual installment of impeachment proceedings against President Rousseff. With the economy is in the middle of recession, and unemployment on the rise, the likelihood of growing popular support for the President’s removal is high. Pressure from the Brazilian people to push forward with impeachment would likely provide the impetus for the opposition to gain the additional votes (either from the two major blocks that now are a part of the government or from Brazil’s various minor parties) needed to open impeachment proceedings, while also providing the momentum for the Senate to convict the president with a two-thirds majority.

• The Chamber of Deputies votes to open impeachment process but Senate fails to convict the president (5% likelihood): FSG believes the likelihood of this event to be relatively low, as achievement of the necessary and demanding two-thirds majority in the Chamber of Deputies in order to open an impeachment proceeding would likely require some sort of tacit agreement between the PMDB and PSDB, thus demonstrating the political will to carry through with the final removal of the president in the Senate.

Consequences:

• Immediate consequences (next two months): The recent decision by Cunha to move forward with a vote on possible impeachment proceedings is likely to drive heightened uncertainty and currency volatility while also pushing out the passage of currently contemplated measures to raise new tax revenue, contributing to further deterioration of fiscal accounts.

• Short-term consequences (H1 2016): If impeachment proceedings are opened against Rousseff, multinationals should expect heightened uncertainty and legislative paralysis to continue for up to an additional six months while the impeachment proceedings unfold, regardless of what the final outcome of impeachment proceedings is. Inasmuch, the elevated political turmoil could prove the catalyst that pulls forward Brazil’s downgrade to junk status by a second rating agency, driving a new exodus of foreign capital and currency depreciation while potentially delaying economic recovery, which we had slated for mid-2017.

Even in a scenario in which Congress votes against impeachment, FSG believes that President Rousseff (though no longer facing a threat of impeachment from Congress) would continue to confront difficulties in building the necessary political support to pass measures to alleviate threats to the government’s long-term fiscal sustainability. However, the avoidance of a prolonged impeachment process would help to limit the negative effects on the economy.

• Medium to long-term consequences (H2 2016-2018): FSG believes a scenario in which Rousseff is permanently removed from office would provide the country with the best possible situation in the long-run to recuperate political cooperation and set the country on a sustainable growth path. However, if the president is impeached in front of the Senate but not convicted, there is a high chance that economic recession would extend to 2018. Such a result would be a direct consequence of political paralysis generate by the impeachment proceedings and plummeting investor confidence caused by the return of President Rousseff to power. Finally, a scenario in which President Rousseff does not face an impeachment trial would produce only a marginally improved political situation, with recovery hinging on the recuperation of investor and consumer confidence ahead of new presidential elections in 2018.

Actions to take:

Given the highly uncertain environment to which the Brazilian market is headed, companies should consider revising their exchange rate assumptions while also instilling strong contingency planning in order to ensure resilience in the face of potential extended economic contraction. Additionally, regional and country managers should be confirming adequate alignment with corporate headquarters in terms of growth expectations and key strategies that need to be implemented throughout Brazil’s recession and path to recovery.

We encourage you to read this recent article that we published in the Harvard Business Review, which covers some of the strategies that we believe multinationals should adopt to maintain sales growth and profitability in Brazil in the current economic and political environment.

FSG clients should also access our Brazil 2020 Outlook and Scenarios report to understand how the current crisis will shape the future of the Brazilian market, and how companies should be preparing to win in the new Brazilian reality. Finally, FSG clients can also follow the links below to recent FSG pieces on Brazil specific management best practices research for help as you revisit your strategy to win in the Brazilian market:

• Brazil’s Second M&A Wave: Best Practices for Approaching Acquisitions in Brazil
• Brazil’s Subnational Prioritization for B2B, B2C and Healthcare Companies
• Channel Strategy in Brazil
• Brazil’s Distribution Landscape
• Local Manufacturing in Brazil

For our latest updates on Brazil, FSG clients can visit the client portal. Not a client? Contact us to learn more.