Brazil scandal paralyses reform agenda

President uniquely placed to take risks

The news from Brazil confirms that the federal police are investigating more than 100 current and past politicians for taking bribes from oil major Petrobras via third party companies. The individuals involved include almost a third of the Brazilian cabinet, the chief of staff to President Michel Temer, and every head of state going back to 1985.

The scandal may paralyse the Temer government’s much-needed reform programme. The administration wants to address everything from the huge fiscal deficit, to pensions, to the time it takes to open businesses in highly-regulated Brazil, where it takes 100 days to open a company.

The fall-out from this investigation may also halt the remarkable trajectory of the Brazilian market in the past year. It is extraordinary to consider that, though the previous president was beset by impeachment proceedings and economic data from growth to unemployment worsened, Brazil’s equity market has been by far the strongest among emerging economies. Markets have risen by nearly 40% in that period, with foreign investment flowing into the country as well.

‘We cannot allow this to freeze our legislative agenda,’ Temer declared, as investigators leaked the fact that he escaped being on the list only because a sitting head of state has, constitutionally, immunity from investigation for anything pre-dating his appointment. ‘Our work to revive our country has to go on,’ Temer said.

The crunch is likely to come over the next few weeks. With the economy having shrunk by 3.6% in 2016 and following eight consecutive negative quarters, representing the worst recession on record in Brazil, the Temer government has already acted on one critical front. The administration has pushed through a constitutional reform requiring a reduction in government spending, to 15% of GDP from 20%, over the next decade.

‘But it is pension reform that lies at the heart of Temer’s plan,’ according to a leading banker and major supporter of the president in São Paulo. ‘Can his government make our country accept that we have to live by the rules of the rest of the world, and put back retirement until 65? It’s a hard sell for the average Brazilian, trust me.’ That task has been made more difficult in the light of the bribery investigation: Temer’s point man on pension reform, Chief of Staff Eliseu Padilha, is a prime suspect. Padilha has led the campaign to convince Brazilians that the country’s pension deficit, $67bn in 2016, is unsustainable.

If there’s an unseen benefit in this crisis, it lies in Temer’s personal position. With elections due next year and the president insistent that he will not run, his allies suggest he is uniquely placed to take risks on reform. As one supporter put it: ‘Think about it: Temer has nothing to lose, he can go for broke, and dare to demand our country change its pension system, its tax code, and even allow entrepreneurs to set up a company in three days. That’s his goal.’

Earlier in April Judge Sérgio Moro, the chief lawyer in the Brazil bribery investigation, visited Argentina, the other leading Latin American country committed to combatting government corruption. Moro’s message was blunt: ‘There’s no reason Latin America has to live with such corruption, and there can be no stopping us now.’

That significance of that decree to Argentina should not be underestimated. The government of Mauricio Macri in Buenos Aires insists that the Argentinian judiciary must be free to bring leaders of the previous government to justice for alleged corruption on a massive scale.

‘Our institutions in Latin America are not yet acting as one when it comes to corruption,’ Moro said. ‘But justice is on the march in our major countries, getting stronger all the time, and Argentina is showing us too that confronting corruption is not an option: it’s a must, for the benefit of all who live and work in a country’s economy.’

David Smith is a Member of the OMFIF Advisory Board and represented the United Nations Secretary-General in the Americas between 2004-14.

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