Temer Off to Bumpy Start in Setting Brazil Economy Straight

  • Budget minister forced to step down day before key vote
  • Acting president has committed other errors since taking over

It took only 11 days in office for Brazil’s Acting President Michel Temer to suffer his first major setback.

The day before he was due to shepherd a bill through Congress to help revive investor confidence, Temer’s Budget Minister Romero Juca on Monday was forced to step down over allegations that he wanted to obstruct a probe into graft and money laundering. The controversy emboldened critics of Temer, who heckled the acting president when he entered Congress and prevented him from speaking to reporters.

The drama smacked of deja vu to many Brazilians and political analysts who saw the same corruption investigation taint members of the previous administration and hamstring its efforts to stimulate growth. While he was quick to assemble what Goldman Sachs Group, Inc. termed a "dream team" of economic advisers, Temer has committed missteps that are making some investors question whether they were overly optimistic that he could fix Brazil’s woes.

"This is the tip of the iceberg," said Juan Carlos Rodado, the director of Latin America research at investment banking firm Natixis North America. "Everyone knows his room to govern is relatively limited and that the entire political class is somewhat involved, which implies that political uncertainty will persist."

Analyst Lucas de Aragao at consulting firm Arko Advice said the allegations are particularly damaging because they were centered on a pillar of Temer’s economic team, who was tasked with shoring up fiscal accounts.

The real rebounded on Tuesday after leading losses among major currencies on Monday. In late morning session in Sao Paulo, the real was 0.4 percent higher to 3.56 per dollar.

Budget Vote

Now Juca will return to the Senate and on Tuesday could vote on legislation that he helped design. The bill would allow the government to report a budget deficit before payments on interest this year, rather than a surplus as originally proposed by Dilma Rousseff’s administration. Juca said last week the proposal is an important signal to investors that Brazil is becoming more realistic and transparent about its accounts.

Temer is scheduled to discuss the budget with reporters on Tuesday, while laying out his strategy to eventually shrink the so-called primary deficit. Reporters probably will push him for answers on Juca and Carwash.

Monday’s controversy wasn’t the only setback for Temer since he took over the top job this month. He attracted criticism for appointing an all-male cabinet with no black ministers, and gave up on plans to eliminate the Ministry of Culture following a backlash from Brazil’s artistic community.

But Monday’s events were different because they involved Carwash, which has the potential to unearth fresh allegations against members of Temer’s administration, many of whom are accused of wrongdoing. Accusations that Rousseff was soft on corruption and that members of her cabinet were involved in the probe hurt her approval rating and fueled massive anti-government protests.

"Political instability will continue to prevail in the new government," said Bruno Rovai, Brazil analyst at Barclays Plc in New York. Temer’s government probably will be "negatively affected by the instability caused by the Carwash investigations."

Breaking News

Folha de S. Paulo newspaper broke the news on Carwash Monday when it published recordings of conversations that took place in March between then-Senator Juca and a former oil executive. In the discussions, the minister allegedly said Rousseff’s impeachment would lead to a government that could prevent the probe from proceeding.

The minister said his comments were taken out of context, adding that he would step down until prosecutors answer whether the recordings show evidence of wrongdoing.

"I’m one of the builders of this new government, and I don’t want any malicious slander to undermine it," he said.

Juca’s decision to temporarily step down was a good solution politically because it takes him out of Temer’s administration without alienating members of their political party in Congress, said Roberto Padovani, chief economist at Brazilian bank Banco Votorantim SA. Analysts at political consulting firm Eurasia Group said the development is unlikely to derail Temer’s plans for the economy.

"With Juca back in the Senate, the risk of unnecessary distractions getting in the way of the reform agenda will diminish," Eurasia analysts wrote in a research note.

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