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Rousseff’s Impeachment Alone Won’t Fix Brazil’s Economic Woes

By Yesenia Lugo

brazil-economy1The biggest party in the governing coalition abandoned President Dilma Rousseff last week, increasing the likelihood that the leader of Latin America’s biggest country will be impeached and opening up the country to uncertainty.

The $3 billion dollar scandal that’s engulfed Brazil has its origin in a cluster of construction companies and politicians colluding with Brazil’s state oil company, Petrobras, to overcharge a myriad of projects over the years and then split the cash amongst each other. It’s a scandal that has implicated more than half of Brazil’s Congress in taking part and introduced the idea of impeaching President Dilma Rousseff herself.

Operation Car Wash

Rousseff was sworn-in as the first female president of Brazil on Jan. 1, 2011. She took office in a Brazil that was for the most part optimistic about its future, since Brazil had seen a decent comeback from the global recession. That recovery was largely due to the rise of oil prices. This, in turn, was an advantage to state-owned oil company Petrobras, of which Rousseff was chair from 2003 to 2010.

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In 2014, the investigation into the money laundering at Petrobras, dubbed “Operation: Car Wash” where money was suspected of changing hands, expanded into the political sphere. For example, companies would decide amongst themselves which of them would contract to build a project, i.e. an oil rig. They would then proceed to charge exceedingly more for the process than was actually necessary. Afterwards, they would split the excess of money with executives and politicians who looked the other way.

What is troubling to the people of Brazil is that Petrobras is 51% owned by the government, thereby making it a real possibility that these kickbacks were shared with politicians, who then used the funds for their respective campaigns. These revelations have infuriated the public, and led to massive protests and demands for the resignation of Rousseff.

Rousseff’s Demise

Brazil came to a tipping point when investigators brought in former president Lula da Silva for questioning related to the scandal. He was later charged. Lula da Silva is an extremely popular figure, especially with people who benefited from his anti-poverty programs. Meanwhile, Rousseff announced Lula da Silva as her new Chief of Staff, a powerful political position that would shield and grant him immunity from prosecution. All of this has made Rousseff’s position precarious.

The very recent departure of the Brazilian Democratic Movement Party (PMDB) from the ruling coalition, a move which was expected, has made it entirely likely that some of the other smaller parties that normally support Rousseff’s party could potentially also abandon her soon.

Under Brazil’s presidential system, Rousseff would continue to remain in office for the moment. However, her Workers’ Party has only 58 of the 513 seats in the National Congress. This would make it difficult for her to gather the necessary and essential votes to fight off her removal by the legislature. To get the process started, the opposition would require two-thirds of the lower house of Congress to vote in favor of impeachment. The uncertainty would then lie with Rousseff, who must produce a one-third plus one vote to beat the impeachment nightmare.

What Does This Mean for Brazil’s Economy?

On the economic front, the Brazilian real has strengthened 9.9 percent this year, a trend that is reinforced by speculation that Rousseff will lose the battle to avoid impeachment. There is hope among Brazil-watchers that a new administration may come in and thereby achieve economic stability. Oil prices have steadily decreased, leaving the economy in turmoil and alienating the people away from the leadership.

The benchmark stock index, the Ibovespa, has returned an 18.2% gain since the end of December. In March alone, Brazilian stocks have soared 20%, the biggest one-month gain in 16 years.

However impeachment does not guarantee an end to the recession. Theoretically, Vice President Michel Temer, of the PMDB, would replace Rousseff. However, even he is the subject of at least two corruption allegations. This has in turn complicated the position for investors, who seem to be focused on the increased chances of a government falling in order that it may lead to a more market-friendly government.

Brazil’s economy needs effective and rehabilitative reforms. With protests against Rousseff and her administration gaining momentum, Congress in disarray over the scandals, the economy near a breaking point, and the threat of impeachment becoming a reality, it remains to be seen just how Brazil will get back on its feet.


Courtesy of Global Risk Insights © 2016

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