The Brazilian political environment continues its meltdown. This week, the PMDB (led by Vice President Michel Temer), the largest party in the Workers’ Party governing coalition, abandoned ship and left President Dilma Rousseff to deal with her impeachment process by herself. This happened after several weeks of complete turmoil, including street protests by the opposition and counter-protests or mobilizations in support of the Rousseff administration.
Recent weeks have also featured the brief incarceration of ex-president Lula da Silva, an attempt by Rousseff to name Lula da Silva as her chief of staff (which has subsequently been put on hold by the courts), the selective release of phone conversations between Rousseff and da Silva regarding his appointment as chief of staff, among other developments.
Of course, in this environment it is very difficult for the economy, which was already tanking, to recover. This is particularly concerning at a time when the factors that supported growth in the prior decade—stronger global growth, expansionary monetary and fiscal policy and higher commodity prices—are less supportive today. This does not imply that Brazil cannot emerge from recession as it did after the early 1999 crisis. At that time, however, the political system was very durable and there was a strong commitment to structural reforms. This is arguably less true today. Although markets are speculating about a successful impeachment process against Rousseff, the aftermath of a successful impeachment process is not clear as da Silva remains the most popular living ex-president in the country’s history.
Global Economy to the Rescue?
Brazil’s domestic economy is in shambles, but is the global economy coming to the rescue? Do not count on it. It is true that the depreciation of the Brazilian currency has given some competitive edge back to Brazilian producers. However, for the global economy to make a difference, it has to be in a much better shape than it is today. Having said this, there are some potential positive developments that will probably help, on the margin, the Brazilian economy during this year and next. However, we are still forecasting a steep recession this year and a very weak recovery afterwards.
Read the complete Special Commentary from Wells Fargo here: brazil-political-environment-20160330