The Brazilian Senate voted yesterday (August 31) 61-20 to finalize the impeachment of President Dilma Rousseff. Shortly after the vote, interim president Michel Temer was sworn in as the official office holder. President Temer will now complete the current mandate that runs through the end of 2018.
While this occurrence has been a part of FSG’s base case for the Brazilian market since December of last year, and will thus only marginally affect our economic forecast, it does mark a clear beginning of the end of Michel Temer’s honeymoon period with financial markets for implementing clear and credible fiscal reform.
On that note, multinational executives with Brazil responsibility should closely follow key reform bills passing through Congress in the coming months, as Temer will need to begin showing real progress in order to retain market confidence. Indeed, FSG’s base case for the Brazil market is for the Temer government to fail to implement its full reform package, therefore dashing any hope of a robust recovery in the short-term with growth above 3% pushed out until 2019 (following the next presidential election in October of 2018). Such failure would also likely drive a renewed round of depreciation for the Brazilian real (which will also be pressured by diverging monetary policy in the US and Brazil).
- GDP growth forecasts: -3.6% in 2016; +1.1% in 2017
- Exchange rate forecasts (average of period): 3.55 BRL/USD in 2016; 3.8 BRL/USD in 2017
In order to track progress toward fiscal reform, and thus evolution of the likely trajectory of the economy, executives can follow these measures as they work their way through Congress.
- Introduction of a pension reform bill (expected to be introduced by October 2016)
- Amendment that creates federal spending ceiling (expected to be passed by November 2016)
- Introduction of labor market reform bill (expected to be introduced by December 2016)
- Final passage of a pension reform bill (expected by May 2017)
The most important measure is the pension reform bill, without which the other reforms will fail to bring fiscal deficits down to a sustainable growth pattern, as pension payments now represent nearly half of the federal government’s current spending. However, at the same time, this will be the most contentious reform measure, as the government will need to reduce defined benefits for a large swath of the population. In order to enact such reform, it is likely that the Temer government will need to garner much greater popular support than it currently counts on, a hard prospect for an administration brought to power on an impeachment vote amid a deep economic recession.
Furthermore, while current numbers would suggest that the Temer government has the necessary two-thirds support in the Chamber of Deputies and Senate to pass consitutional amendments, neither the government coalition or the president’s party itself (the PMDB) can be viewed as homogenous groups. This makes it necessary for Temer to manage not only internal discord between his coalition partners (broken up between the so called ‘Centrao’ and ‘Centrinho’) but also makes it necessary to hold together support within the PMDB itself, which became more difficult post Eduardo Cunha. The signficance being that more concessions will be necessary in order for the government to have a chance at passing its major reform bills. In this respect, the battle for the presidency of the Chamber of Deputies, which is set to change hands at the beginning of 2017 will go a long ways to determing Temer’s continued strength in this body.
While the short-term outlook remains subdued, executives should continue to follow consumer and industrial confidence as well as key credit indicators (such as family indebtedness and headline interest rates) for signals that demand in the market may be about to improve, at least marginally. For short-term growth in the Brazil market, multinationals will need to continue to seek ways to demonstrate greater value through either providing value-added services or by proving the cost saving nature of their products. At the same time, certain industries and geographies are likely to show greater strength sooner, necessitating a more nuanced approach towards customer segmentation and subnational prioritization.
For our latest updates and insights, FSG clients can visit the client portal. Not a client? Contact us to learn more.