Features

The fall of Dilma Rousseff

Brazil’s lower house of Congress has voted to impeach the president. Why? Will it spark a broader crisis? And what does it mean for investors? Simon Wilson investigates.

16-4-21-Brazil-634

Brazil's lower house of Congress has voted to impeach the president. Why? Will it spark abroader crisis? And what does it mean for investors? Simon Wilson investigates.

What's happened?

Brazil's President Dilma Rousseff looks very likely to be removed from office later this year, after the lower house of Congress voted last Sunday to impeach her. Her alleged crime? Manipulating government accounts in order to hide the budget deficit and gain a political advantage something Rousseff claims her predecessors all did too.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Some 367 of the 513 deputies backed her impeachment, despite the fact that many of them face far more serious corruption allegations than Rousseff. Sunday's vote was a much more decisive victory for her opponents than expected, comfortably beyond the two-thirds majority needed. This makes it overwhelmingly likely, say analysts, that the Senate will also now vote to impeach the president in a vote expected around 11 May.

What happens after that?

If the Senate votes by a simple majority of its 81 members to accept the motion, a formal impeachment trial will begin. Rousseff will be suspended from office for up to six months and her vice-president, Michel Temer whose party jumped ship from the governing coalition a few weeks ago, and whom Rousseff accuses of plotting to oust her will take over as acting president.

Advertisement
Advertisement - Article continues below

But if two-thirds of Senators vote to impeach her, Rousseff would be barred from office and Temer would take over until the next set of elections, which are due in 2018. At least, unless and here's where it starts to get tricky Temer is himself impeached over corruption allegations that relate to an illegal ethanol-buying scheme.

Who'd be president then?

Another senior member of Temer's centrist PMDB party, the Speaker of the lower house, Eduardo Cunha, is next in line under the constitution. Cunha has been the driving force behind Rousseff's impeachment, but he, like Temer, is accused of criminal wrongdoing he faces trial in the Supreme Court for allegedly pocketing £3.5m in bribes relating to the kickbacks scandal that has engulfed Petrobras, Brazil's vast state-owned oil giant. And should Cunha become unavailable, even the next in line, the Senate leader Renan Calheiros yet another PMDB figure is also accused of taking Petrobras bribes, as well as facing separate tax fraud charges.

Is this a coup, as Rousseff claims?

Not in the strict sense of an illegal and overt seizure of power. On the contrary, the impeachment of Rousseff albeit on relatively flimsy grounds is following the mandated constitutional procedure to the letter of the law, and has the support of about two-thirds of the population. That said, it is hard not to have some sympathy for Rousseff an unpopular leader being driven out by allies-turned-opponents who look every bit as dodgy as she does, and then some.

"The impeachment is on relatively weak constitutional grounds," says Eurasia Group political risk analyst Christopher Garman. But in reality this is not solely a vote on the fiscal sleight of hand, it's a vote on "the massive corruption probe,deep recession and a series of other issues that have plagued this administration".

How did it all go so wrong?

Rousseff was made vulnerable by the tanking economy: once a high-growth powerhouse, Brazil's economy has been smashed by the downturn in the price of its key commodities (including oil, iron ore and soya) and a flailing response by the government, which has been unwilling or unable to tackle low productivity or cut unaffordable public spending. GDP has shrunk by 3% in each of the last two years, while inflation has hit double digits, increasing the sense of a country in crisis.

Since her narrow re-election in 2014 (following an especially divisive campaign), Brazil's political class has been shaken by the scandal at Petrobas, which has dragged in senior politicians of all parties, but especially Rousseff's Workers' Party (PT). When things started to go wrong, this political novice the president is a former Marxist guerrilla who had held no elected office before becoming president was "unable to get the situation under control and her lack of flexibility and stubbornness made things worse", says Mathieu Turgeon, a political scientist at the University of Brasilia. "All of this has now caught up with her."

Advertisement
Advertisement - Article continues below

What does this mean for investors?

If Temer does take over, there's at least a chance that his more liberal economic plans will help fix Brazil's economic mess, and the markets have rallied sharply this year amid hopes that both the country and commodity prices have seen the worst. Temer favours a more open economy, privatisation of some state-owned industries, more flexible labour laws and an end to inflation-linked pensions all things that traditionally are "music to investors' ears", says the Financial Times. But there are some big caveats.

Temer's honeymoon period will be brief, and he'll have no popular mandate to introduce sweeping reforms. Secondly, the fallout from the Petrobas scandal, and the rancour that is likely to flow from Rousseff's impeachment (the Workers' Party has said its opposition to the "coup-mongers" will be "total" in Congress and on the streets) means Brazil's politics could well remain stuck in a state of near-paralysis.

Is a wider crisis on the cards?

The irony is that fixing Brazil's economic malaise couldactually be straightforward, says Neil Shearing of CapitalEconomics. What's needed is tighter fiscal policy, lowerinterest rates, a weak currency and (eventually) structuralreforms to raise savings and investment.

The consensusin Brazil, however, is that the opposition lacks the will andpolitical capital to push through any such agenda. Morelikely is that public disenchantment with the entire politicalclass now threatens a wider crisis with potentially "extremeoutcomes" that pose a threat to Brazil's young democracy.In any event, this story has a long way to run.

Advertisement

Recommended

Visit/investments/stockmarkets/600688/bullish-investors-return-to-emerging-markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Visit/520181/how-the-fear-of-death-affects-your-investment-process
Investment strategy

How the fear of death affects our investment processes

Many of our investment decisions are driven by one simple fact: the knowledge that, one day, we will be dead. Here, in an extract from his new book, J…
2 Jan 2020
Visit/520060/the-good-and-the-bad-investments-of-2010s
Stock markets

The good investments of the 2010s – and the bad

John Stepek takes a look back on which investments did well and which did badly in the decade that’s about to come to an end.
26 Dec 2019
Visit/519872/beware-the-hidden-risks-when-investing-in-emerging-markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019

Most Popular

Visit/investments/investment-strategy/600804/the-secret-to-avoiding-being-panicked-out-of-your-portfolio
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020
Visit/investments/commodities/silver-other-precious-metals/600812/buy-silver
Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020
Visit/investments/investment-strategy/600772/just-five-assets-matter-for-investors-portfolio-asset-allocation
Investment strategy

Just five assets matter for investors. Here's what they are

Every investor’s needs are different – but most can be met by the right combination of five investments
11 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020