Temer Gets First Win as Brazil Congress Approves Budget Goal

  • Lawmakers voted after marathon session that ran past midnight
  • Lack of voting tally makes unclear how much support Temer has

Brazil’s Acting President Michel Temer enjoyed his first victory in Congress on Wednesday when legislators approved his request to change this year’s budget target.

Actong Brazilian President Michel Temer on May 24.

Actong Brazilian President Michel Temer on May 24.

Photographer: Evaristo Sa/AFP/Getty Images

Lawmakers in a joint session of Congress supported government legislation that allows it to post a budget gap before interest payments of 170.5 billion reais ($47.7 billion) in 2016, rather than a primary surplus as proposed by the previous administration. The Senate and lower house approved the motion by acclamation following a marathon session that ran well past midnight.

Investors use Brazil’s primary budget result to gauge the country’s fiscal health and its ability to service debt. The country last year lost its investment-grade status after the three major rating companies expressed growing concern over government finances. Had lawmakers rejected the administration’s request, it would have been forced to drastically cut spending and shut down many government services in order to meet the original target of a primary surplus.

While Temer called the approval a “beautiful victory,” political analysts including Carlos Melo, from Sao Paulo-based business school Insper, said the lack of a voting tally didn’t make it clear how much support the government will have to pass more controversial measures in coming weeks.

QuickTake Brazil's Highs and Lows

“Apparently approval by acclamation was done to speed up a vote that was extending into the wee hours," Melo said in an e-mailed response to questions from Bloomberg. “I think that is unlikely to be the only reason, given the conflict in which the country finds itself.”

The Brazilian real weakened 0.9 percent to 3.60 per dollar at 12:20 p.m. local time, after gaining as much as 0.55 percent earlier, as investors remained cautious about prospects for the approval of crucial fiscal measures.

Temer now faces the challenge of sustaining that initial support as he asks lawmakers to pass unpopular fiscal-austerity measures that are designed to shrink the near-record budget deficit.

For a detailed look at Brazil’s fiscal crisis, click here.

“There’s a feeling that the government does have a coalition and passed this first test in the legislative process,” said Rafael Cortez, political analyst at Tendencias Consultoria Integrada. “The hope is that it can hold on to that to approve the economic measures.”

Top Job

Temer, 75, took over Brazil’s top job less than two weeks ago on promises to unify a country that grew increasingly polarized during his predecessor Dilma Rousseff’s impeachment battle. While her supporters still denounce Temer as the architect of a coup against her government, his administration enjoys the support from many legislators who until a few months ago were loyal to Rousseff.

“Temer has averted conflict with parties that could become part of his allied base,” said Thiago Vidal, a political analyst at Brazilian consulting firm Prospectiva. “The result of today’s vote was widely expected.”

The acting president is betting he can pick up additional political capital if he manages to put the recession-battered economy back on track. To achieve that goal, Temer said on Tuesday he’ll ask Congress to limit subsidies and approve a cap on government spending. He also suggested he could shut down Brazil’s sovereign wealth fund and improve corporate governance at public pension funds and state-run companies.

For an analysis of Temer’s economic challenges, click here.

Structural reforms including a limit on government spending are more important than one-time budget cuts for putting Brazil’s fiscal accounts in order, Finance Minister Henrique Meirelles said Tuesday. The spending ceiling will be adjusted according to inflation from the previous year, with expenditure requirements for health and education subject to that limit, he added.

‘Reform Agenda’

Two of the measures announced Tuesday -- scrapping the country’s sovereign wealth fund and asking development bank BNDES to repay its Treasury debt -- could be implemented by executive decision, and both would help reduce the public debt.

Yet the spending cap entails amending the constitution. To achieve that, the government would need support from at least three-fifths of Congress. Members of Temer’s political party say they’re confident they have enough votes even after Romero Juca -- who was spearheading efforts to pass the measures in Congress -- was forced to leave Temer’s cabinet this week and return to his previous job as senator.

“While Juca’s departure was a setback, everything suggests the Senator will remain a key leader coordinating Temer’s reform agenda in Congress,” analysts at political consulting firm Eurasia Group wrote in a research note on Tuesday. “Temer’s reform agenda will advance.”

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