After three years of recession, this week Brazil looked like it had finally pulled clear of its recession. A large part of this renewed faith from investors was President Michel Temer’s stringent economic reforms. Although widely unpopular among Brazilians, the reforms looked set to attract economic growth, little by little.
But with last night’s leaked recordings from the JBS plea bargain implicating Temer, his presidency is now uncertain. Two senior government figures have formally requested his impeachment. Other alternatives are his resignation, or cassation by the Superior Electoral Court. The leak has already been termed a ‘circuit breaker’ in reference to its effects on the Brazilian stock market. Not only did the stock market drop 10 percent in a matter of hours, but the Brazilian real lost 5 percent against the U.S. dollar.
What’s next for Temer’s reforms?
Beyond resisting calls for him to step down, it’s going to be harder than ever for Temer to push through his controversial reforms. Investors’ actions make it clear that their interest in Brazil depends on passing these measures.
The 20-year federal spending cap, passed in a Constitutional amendment in December 2016, caused several months of protests before the vote. Amnesty International condemned the project, as did the UN’s special rapporteur on extreme poverty. But the markets reacted favorably, and investors began to look towards Brazil.
This was only the beginning for Temer’s reforms. The latest and most controversial of these is the pension reform. Politicians will not publicly defend it due to its unpopularity. But with so much political pressure behind closed doors, many were about to vote for it. However, with the latest corruption scandal throwing political certainty up in the air, these reforms may not be going anywhere after all.
According to Marcel Balassiano, an applied economics professor at Fundação Getúlio Vargas’s Institute of Brazilian Economics, the pension reform now hangs in the balance as the government faces total uncertainty over its next steps.
“The Temer government had a strong coalition in Congress, although the government was still going to suffer some difficulties to arrive at the number of congressmen for the vote,” Balassiano told plus55 over the phone.
Balassiano says that with or without Temer in office, there is still a chance that the reforms will pass. “But because of what happened yesterday, we just don’t know.”
Without the reforms, what will happen to Brazil’s new economic growth?
Balassiano told plus55 that it could be possible for Brazil to plunge headfirst back into its recent recession.
“The uncertainties are huge because there are various scenarios that could happen,” said Balassiano, referring to the developing scandal surrounding President Temer. “This all has a huge impact on the economy, which was really bad coming from the recession. Yesterday’s events created huge uncertainty for politics and economics.”
Balassiano says that it’s impossible to know what the long-term effects will be on the economy. However, he is not optimistic about the short and medium term. “The confidence that was coming back will remain paralyzed,” he said. “The country’s risk grew a lot.”