Despite uncertainty over the new government’s reform programme, the markets and investors reacted positively to the political changes of the past few months. The same cannot be said for the local population, who fears a shift towards liberalism and the hardships of reforms, after weathering the turmoil of the political and economic crisis over the past two years. Squeezed by a sluggish labour market, a decline in purchasing power eroded by inflation and a heavy debt burden, household consumption is unlikely to make a positive contribution to the economic recovery for several more months. Even so, the economy could benefit from a gradual rebound in private investment.
- Eyes on reforms
After president Dilma Rousseff (PT) was officially ousted on 31 August, vice-president Michel Temer (PMDB), the interim president since 12 May, was sworn in with full powers as Brazil’s new president. The collapse of the Workers’ Party (PT), discredited by the Petrobras corruption scandal, was confirmed following the municipal elections of 2 October (runoffs will be held in certain cities on 30 October). The PT was relegated to 10th place among the political parties after losing 59% of the municipalities it has held since 2012. Although the people rejected the political class as a whole, the Brazilian Democratic Movement (PMDB) and Brazilian Social Democracy Party (PSDB) were the big winners of these local elections, which have taken on a national character in the current environment. Allies within the new government, the two parties seem to be heading for a confrontation in the 2018 general election.
With its legitimacy bolstered by the municipal elections, the Temer government now seems to be in a good position to launch its full reform programme – which is highly unpopular with the local population – at a time when public finances remain under pressure. The primary deficit continued to widen, to 2.8% of GDP in the 12 months to August, while the overall deficit has levelled off at 9.6% of GDP, thanks to profits generated by the central bank’s currency swap operations against a backdrop of the real’s appreciation. Gross public debt rose above 70% of GDP in August.
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by Sylvain BELLEFONTAINE