Temer Stumbles as Congress Balks at Brazilian Spending Cap

  • Government was forced to delay vote on state spending limits
  • Setback ‘wasn’t a good sign for investors,’ MCM wrote in note

Brazil’s Acting President Michel Temer is facing growing opposition to a bill that limits the amount of money state governments can spend, showing that his plans to shore up public accounts may prove more difficult than expected.

Temer’s allies in Congress on numerous occasions have been forced to postpone voting on the legislation, with the most recent delay occurring Tuesday night. The administration’s leader in the lower house, Congressman Andre Moura, said at the time the government needed to build up support for the bill and would try to bring it to a vote next week.

The episode illustrates how repeating Temer’s early victories in Congress on central bank nominees and budget targets is proving difficult on more controversial issues. It also undermines one of Temer’s often-touted claims that he can succeed where his predecessor Dilma Rousseff failed by winning legislative approval of belt-tightening measures, which are designed to revive investor confidence.

"The government may not be able to get its fiscal adjustments passed in the way it wants," said Thiago de Aragao, a partner and director of strategy at political-risk consulting company Arko Advice. "It has to know how to spend its political capital wisely."

Billion-dollar Deal

Temer used his clout in June to strike a deal with governors to renegotiate 427 billion reais ($132 billion) in debt that they owe the federal Treasury. According to the terms of the agreement, the cash-strapped states will receive a discount on their repayments for two years if they agree to cap expenditures. While the terms of the deal already are in effect, Congress must approve them before they become permanent.

Many state employees have criticized the agreement and are asking lawmakers to block it, saying it would force local governments to freeze their salaries. "There was a lot of pressure from civil servants, and that carries weight," said Congressman Rogerio Rosso, a leader of the PSD party that is part of Temer’s ruling coalition.

Pressure may intensify even further, as parties caution their lawmakers about the political cost of spending cuts ahead of municipal elections in October. Finance Minister Henrique Meirelles said Wednesday it could become difficult to get the quorum needed to hold votes in Congress as legislators spend more time campaigning for local elections. 

Investors who are concerned about the challenges facing the government in Congress caused the real to depreciate as much as 1 percent in early trading.

Tuesday’s voting delay "wasn’t a good sign for investors because it shows the government may not have the political strength to approve tougher measures," analysts at Brazilian consulting firm MCM Consultores Associados wrote in a report.

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