Brazil’s Congress reconvenes, mired in pessimism

February 2, 2016
A coffin that represents Brazil's President Dilma Rousseff burns during a protest calling for the impeachment of Rousseff in front of the National Congress in Brasilia, Brazil, December 13, 2015.  REUTERS/Ueslei Marcelino - RTX1YHDB

A coffin that represents Brazil’s President Dilma Rousseff burns during a protest calling for the impeachment of Rousseff in front of the National Congress in Brasilia, Brazil, December 13, 2015. REUTERS/Ueslei Marcelino

Brazilian lawmakers return from their annual recess today with an overwhelming list of work to do as the country sinks into a broadening political, economic and health crisis.

And yet expectations about their actual capacity to make 2016 a better year than 2015 could hardly be smaller.

While there is little consensus on the measures needed to fix Brazil’s budget, deputies and senators are set to spend much of their political energy this year arguing about if and how President Dilma Rousseff should be impeached – and a whole new program of economic reforms could be started from scratch.

The single most important proposal put forward by Rousseff to plug Brazil’s budget gap, a financial transactions tax known as CPMF, will require months of political wrangling through committees before a final vote.

In the most likely scenario, if approved, it will start to generate revenues for Brazil’s cash-strapped government only in December, according to political consultancy firm Arko Advice, based on a simple look into congressional rules.

Measures to reduce expenses, on the other hand, have not even been proposed yet. Rousseff has promised to back changes in Brazil’s generous pension system, which could include setting a minimum retirement age, but she first needs to deal with the opposition of her own Workers’ Party.

That means the first week of legislative work in 2016 should bring little – if any – concrete steps to soothe markets. Political infighting in Rousseff’s biggest coalition partner, the PMDB party, is expected to make the headlines instead, as rival factions battle to nominate the party’s leader in the House of Representatives. Then comes Carnival.

“February will be an eventful month politically, but light on policymaking,” Eurasia Group analysts said.

In the meantime, prospects for Brazil’s economy in 2016 will probably get only worse – with analysts already predicting a 3 percent economic contraction, a primary budget deficit of 1 percent of GDP and an ever-growing debt.

“The country has reached a point where stabilizing the debt dynamics – which require reforms – is critical for confidence to return,” wrote UBS economists Guilherme Loureiro, Thiago Carlos and Rafael de la Fuente.

“Yet, a reform agenda doesn’t seem to be on the cards, given the government’s limited political support in the Congress.”

They see no turning point in sight and believe Brazil’s is not cheap enough yet, despite a massive currency drop to a record low past 4 reais per dollar.

Analysts at most foreign banks seem to agree, with JPMorgan revising its end-year exchange rate forecast to 4.7 per dollar and Morgan Stanley worried that a recent central bank decision to hold interest rates steady will fuel inflation, even if borrowing costs are already near a decade high.

“We are worried that the recent, more dovish shift from Brazil’s central bank might mean even more inflationary pressures in the future,” Morgan Stanley economists led by Luis Arcentales and Arthur Carvalho wrote.

“We still remember 2011 when they cut rates in the midst of another global growth scare and got us worried that inflation would not ease and, even worse, that the cost to bring inflation back to 4.5 percent would be much higher down the road.”

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