Emerging Markets: Brazil - Are Rousseff’s days in office numbered?

Market analysis - 5/9/2016

The Senate is likely to suspend the president in its upcoming vote
Rousseff’s removal would not guarantee that the country’s economic fortunes will turn around or that domestic assets will continue to recover

Every quarter, the Brazilian economy slips deeper into recession. And since the end of 2014, it has been further burdened by a political crisis that worsens by the day. The table below summarises the country's recent political turbulence.    

  • As of today, the most plausible scenario is that the Senate will suspend Rousseff, allowing the impeachment proceedings to move forward. The latest surveys indicate that 50 senators are in favour of impeaching the president. The fact that the Senate is dominated by the Brazilian Democratic Movement Party (PMDB), which recently broke with the president's coalition, does not bode well for Rousseff. The current vice president of Brazil, Michel Temer, is the PMDB's leader in waiting and would serve as president until the 2018 elections.

Under this scenario, Temer himself could also be exposed to impeachment proceedings. Not only is Temer not popular among the people, but he is also in the Supreme Court's crosshairs. It has asked the Chamber of Deputies to look into allegations that Temer too was involved in manipulating the country's fiscal accounts – the same charge levied against Rousseff. If he were impeached before 1 January 2017, early elections would be held to elect a new president. After 1 January 2017, Congress would be responsible for electing a new president.

An early popular vote would not be to the PMDB's advantage: voting intentions point to a victory for former President Lula, who is from the same party as Rousseff and is known as the man behind Brazil's economic boom in the last decade. In addition, impeachment proceedings against Temer would be likely to fail, since he and the speaker of the Senate are from the same party. 


  • If the Senate votes against holding impeachment proceedings, Rousseff will remain in power. If this were to happen, the disconnect between the political establishment and its electoral base could very easily worsen, with suspicions of back-room bargaining and political deals further undermining Rousseff's legitimacy at the helm of the government.  
  • Impeachment is not the only way out of the current political stalemate. Rousseff could simply resign. But she has repeatedly ruled out this option, which for her would be tantamount to admitting guilt and handing the opposition a victory. Another possibility would be for the Electoral Court to annul the 2014 election for financing irregularities. This would lead to early legislative elections.

Brazil is a complex equation. Improving the country's current account seems to require a weak currency. And greater economic stability will require the political will to enact – and implement – structural reforms. But will the Brazilian political system allow for this sort of reasoned approach to the problem? A number of obstacles seem to stand in the way of a unified and long-term reform agenda: fragmentation across the political spectrum (23 parties are represented in Congress) whose roots lie in the country's federal structure; politicians' weak party loyalty; and the sometimes hazy role played by businesses in party financing.  

There are countless political scenarios, which makes forecasting a challenge. The legal charges hanging over those who could take over for Rousseff only add to the confusion, and there is no guarantee that a change in president will lead to any real break from past practices or fundamentally improve the country's economic situation. That said, Rousseff's impeachment would probably close the gap between politicians and the citizen base ever so slightly. Investors appear to expect impeachment to occur followed by a popular election – a scenario we consider far from certain – which would allow Brazilian assets, including the currency, to continue their rebound.  

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