Date first published: 04/07/2017

Key sectors: all

Key risks: political stability; governability; corruption fall-out; strikes and demonstrations

On 26 June Michel Temer became the first sitting Brazilian president to be charged with corruption. This might seem to be just another move in the judiciary’s attempt to dismantle the ever-growing web of corruption ensnaring Brazilian politicians, the business elite and top-tier companies. It is not. The Petrobras corruption scandal which erupted over three years ago expanded to other investigations, indictments, arrests and trials. These have threatened Brazil’s credibility and political stability, with new shocking but not altogether surprising corruption-related developments hitting Latin America’s largest economy on an almost weekly basis. General Prosecutor Rodrigo Janot’s decision to bring bribery charges against Temer pits the president against his biggest legal challenge and threatens to distract Congress from passing long-delayed austerity reforms without which investor confidence in Brazil will likely deteriorate.

Temer vows to remain in power

Temer has vowed to remain in power. The Superior Electoral Court (TSE)’s decision on 9 June to acquit Temer and former president Dilma Rousseff of charges of illegal financing of their 2014 campaign in a trial that threatened to oust the sitting president certainly gave him much needed breathing space and reduced the changes of a split in the ruling coalition. Congress’s support and the coalition’s survival will remain key for Temer to remain in power over the 18 months he has left in office. Temer’s indictment has put both under increased pressure. Two-thirds of the lower house of congress need to approve Temer’s criminal charges for the Supreme Court to put him on trial. While the government remains confident that the charges will be blocked, ongoing corruption fallout could impact the congressional vote. Moreover, Janot is expected to separately present two additional charges – obstruction of justice and racketeering – in August, forcing Congress to vote yet again whether to accept them and suspend Temer from office.

Proposed labour and pension reforms in jeopardy?

An extended prosecution process and potential new revelations stemming from multiple corruption investigations could erode Temer’s congressional support, increase the chances of a rupture in the ruling coalition and further delay the approval of the labour and pension reforms. The arrest on 3 July of former minister and Temer ally Geddel Vieira Lima for alleged obstruction of justice in a corruption probe involving state-controlled lender Caixa Economica Federal raised the alarm. The arrest happened the week Congress is set to start debating whether to accept Temer’s corruption charges – with a vote expected by the end of July. Moreover, the Senate is expected to vote on the controversial labour reform, which appears likely to be headed towards approval. Uncertainty over the effect of persistent political turmoil on Brazil fiscal position will remain, given that the latter was meant to be addressed by the approval of both labour and pension reforms, now jeopardised by the political crisis.

Temer counts on an economic team that has so far managed to convince markets that efforts to exit the recession and consolidate public finances supersede the political turmoil. The economy grew an estimated 1 per cent in Q1 2017 – mostly due to an exceptional expansion of the agricultural sector – inflation is at 3.6 per cent, a 10-year low; the current account deficit has fallen 1 per cent of GDP in 12 months in May and the level of the currency reserves was at 19 per cent of GDP in June. Nevertheless, even if Temer manages to survive, the full effect of the political crisis on Brazil’s economic recovery remains to be seen.