Brazil: Political uncertainty threatens to delay reforms

In Brazil, the issue of corruption has once again bagged the headlines. People had long suspected that President Temer was also caught deep in the mire of corruption, but with the publication of tape recordings of a conversation with the owner of the major meat corporation JBS Batista in March possible evidence of the President being caught up in dubious transactions have come to the public’s eye. According to the tape, Temer approved payment of hush money to the former President of the House of Representatives Cunha and encouraged this to be continued. Temer claims the accusations are forged and filed for the Supreme Court to drop the investigation opened against him. The court will decide on Wednesday. The focus there will presumably above all be on establishing whether and to what extent the recordings have been tampered with technically.

In other words, this week the Supreme Court faces important decisions. Should it continue with its investigations then there is the threat that the government coalition will come unstuck, which would in turn also endanger the progress of the reform programme. The new elections the opposition insists be held are less likely to materialise, however, as this would require a change in the constitution. And it is unlikely that there will be the necessary majorities in parliament to throw Temer out of office. At least at the weekend President Temer showed considerable tenacity in not budging. The evidence against him will probably have to be a lot harder to persuade him to resign voluntarily.

The Brazilian financial markets have responded to the resurging political uncertainty with clear mark-downs. That said, the continuation of the currently discussed reform of the pension system is key for Brazil’s further development. If the reform process does not get emphatically delayed, then the current developments are unlikely to endure. The global economic environment for growth is robust and oil prices are steady at over USD 50 a barrel. In other words, the Brazilian economy should be buttressed irrespective of the political developments and the economic recovery should persist.

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