President Temer Unlikely to Survive this Crisis

• Impeachment a protected and controversial process requiring the approval of 2/3 of the Congress, itself deeply implicated in the same corruption scandals, hence, an unlikely outcome.
• Decision by the Supreme Electoral Court (TSE) on the ongoing case against the Dilma/Temer candidature in the 2014 election. It could be used as an expedient judicial lever by an activist Supreme Court to resolve the national emergency. However, it would be yet another instance of judicial overreach into political affairs, and resisted
• Resignation with the ability of Temer to negotiate the conditions for his afterlife

In any case, what follows is either an indirect election by Congress or (very unlikely) a constitutional amendment in favor of immediate direct elections, anticipating the 2019 transition.

In an indirect election, the Leader of the Lower House (Rodrigo Maia (DEM)) would become the president pro-tempore and have 30 days to finalize a vote where all members of Congress (Lower and Upper House) vote equally. The details of this process are somewhat murky. What is clear is that the new president would complete Temer’s mandate and preside over the 2018 elections, as scheduled.

Whatever the outcome, the immediate impact is tremendously negative on all fronts, reason why markets have reacted as negatively as they have already.

• The end of the recession is near but now the recovery will be very flat, indeed; forecasts for growth in 2018 will be revised down from 2-3% to possibly 1% or lower.
• Key reforms (social security, labor, etc.) will be delayed, and could have to wait until the next presidential term to be finalized o Monetary policy will remain on a loosening trend, but less aggressively so; and the combination of lower growth, lower revenues, and higher rates, will impact negatively the fiscal accounts.
• The implication is that the path for sustainability in the Debt/GDP ratio will be delayed, and threatened, once again.

Resignation would be the best outcome, followed by the election of a caretaker president with political ties, yet uncompromised with the ongoing scandals—it may be possible.

From the start, the quest for debt sustainability was posed as a 10-year track. To that extent, this maybe a “deviation on the route” and a not a change.

What is clear is that the election in 2018 is the decisive event, and current circumstances favor candidates with “outsider” labels; paradoxically, these events give further impetus to the João Dória’s candidacy, within the PSDB and possibly with the support of the PMDB, thus, with strong chance of success.

IMPORTANT NOTICES:

This report is a general discussion of certain economic and geopolitical trends and forecasts.  It does not constitute investment advice of any kind or constitute a recommendation to buy or sell any security or other financial instrument.  Investors may not rely upon any of the conclusions or other statements contained herein.

Certain of the factual information contained herein was obtained from third party sources which the author considers reliable, but the accuracy of such information cannot be guaranteed.