Brazil President Michel Temer's graft scandal puts ambitious economy reforms at risk

Brazilian President Michel Temer makes a statement at Planalto Palace in Brasilia, Brazil, on May 20, 2017.
Brazilian President Michel Temer makes a statement at Planalto Palace in Brasilia, Brazil, on May 20, 2017.PHOTO: AFP

RIO DE JANEIRO (AFP) - Economic austerity reforms meant to put Brazil's recession-damaged economy back on the rails are in danger now that President Michel Temer is on the verge of being ousted in a corruption scandal, analysts say.

Standard & Poors, the rating agency, reflected the concern on Tuesday by warning it could further lower Brazil's credit rating due to political uncertainty.

"The economy will be very much affected by the crisis," said Gesner Oliveira at GO Associados consultants. "It could be the third consecutive year of recession."

For Temer - accused of corruption and obstruction of justice just as macro-economic signs are improving - last week was simultaneously the "best and worst moment" for his government.

Inflation is steadily dropping and growth is believed to be at the start of a modest recovery, even if unemployment remains dire at nearly 14 per cent. After the economy contracted 7.2 per cent in 2015-16, there are hopes for a renaissance.

Temer has pleaded for Congress to support him as calls for his impeachment grow. "We can't throw so much work for the benefit of the country into the garbage bin," he said.

He needs Congress to push through austerity reforms backed by economists but highly unpopular among ordinary Brazilians. Chief among them is raising the minimum retirement age to try to reduce the unaffordable state pensions bill.

But the scandal has triggered just the kind of economic instability he says he is working to eradicate, with the Sao Paulo stock market falling 8.8 percent last Thursday and the real dropping about eight percent against the dollar.

Future without Temer

Markets want the reforms to continue with or without Temer.

"Congress has to maintain continuity in the structural reforms that are fundamental for putting the country on the right path," the influential National Confederation of Industry said in a statement on Tuesday. It made only one reference to Temer.

However, Geisner Oliveira says the mess means "right now there are no chances" Congress will approve the reforms.

Go Associados projects a possible 0.6 per cent growth in gross domestic product this year, with 150,000 new jobs, if the reforms go ahead. Interest rates now at 11.25 percent could fall to 8.5 percent.

But paralysis in Congress could cause GDP to shrink one percent instead, putting another 380,000 people out of work, with interest rates at 10 per cent, the consultants said.

Economy minister for president?

The market's preferred candidate to replace Temer in case of resignation or impeachment would be the economy minister, Henrique Meirelles, according to the financial daily Valor.

He heads the austerity push and was also head of the central bank during the two terms of leftist president Lula da Silva in 2003-2010, giving him broad credibility.

If pushed out, Temer - who has no vice president - would be replaced by a candidate chosen by Congress until after the next elections in October 2018.

Busy trying to reassure foreign investors, Meirelles told a conference in Sao Paulo on Tuesday that current economic policies would continue "regardless of anything else."