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Analysis

Temer's progress shaken by new scandal

Brazil faces months of political paralysis

by David Smith in Buenos Aires

Mon 22 May 2017

Now is supposed to be the time the government of Brazil seeks passage of extensive pension reforms and validates the faith markets put in President Michel Temer. Instead, questions are being raised about a recording that allegedly makes him complicit in bribing a jailed former head of the lower house of Congress. Temer is facing calls for impeachment, his coalition partners are abandoning the government, and indices across the region have suffered the worst decline since the 2008 financial crisis.

'We had bet on Temer delivering badly-needed reforms, and his government had made such headway,' said a leading banker in São Paulo, where major financial institutions like Itaú Unibanco and Banco Bradesco lost 12% of their value in one day. 'Now the markets are betting that Temer will fall. They seem to believe it's not a question of if, but when.'

That this leak occurred just before a vote to re-configure Brazil's state pension system brings up additional enquiries. The reform would save the federal budget tens of billions of dollars per year.

Temer has said he will not resign and denies any wrongdoing. But with four former presidents already under investigation for corruption, in addition to a third of the Federal Senate, the question of leadership and succession is critical.

'You have to ask who will be left standing to run the country until elections next year if the president goes,' said one of Temer's political advisers in Rio de Janeiro. 'What's at stake here is the biggest reform agenda in a generation. If Brazil loses this moment, it's hard to see a successor tackling our economy’s many fault lines.'

Mired in its worst recession on record, Brazil's economy shrank by 3.6% last year. Temer's government addressed the onerous federal deficit, effectively freezing spending for years to come and slowing inflation in the process. Financial markets applauded Temer as his government opened Latin America's largest economy to foreign investment in everything from oil and gas to airline ownership and airport concessions.

However, pension reform represented the key element of the president's agenda. In a country where most people can retire in their mid-50s, Temer planned to raise the retirement age to 65 for men and 60 for women. Latest government estimates, published just hours before this new crisis erupted, forecast savings of more than $200bn over the next decade.

'Until this point, Temer had defied the odds stacked against him. His low approval ratings did not deter him,' concluded the adviser in Rio. 'He represents the last, best hope of change in his generation of politicians.'

The upside of this new scandal is the way the justice system continues to challenge Latin American history by confronting corruption and investigating bribery. Brazil's relentless investigation of itself in the last two years has triggered growing support elsewhere in the region for strengthening further the independence of Latin judiciaries.

The great disadvantage, however, is that Brazil, a leader alongside Argentina in the region’s reform movement, faces weeks, if not months, of political paralysis.

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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