The Partnership that Might-Yet-Be: DC to Brasilia

By Edmund Ruge

For many Brazilians, the Rio Olympics provided a much-needed break from scandal and political upheaval.  But now that the impeachment process against former President Dilma Rousseff is over, Brazil’s political environment seems to have calmed. Street protests no longer garner thousands of supporters and calls for the ouster of President Temer (#foratemer) have largely petered out.  Political fatigue does not equal approval, however, and the Temer (Brazilian Democratic Movement Party, or PMDB) government is yet to prove its merit to the Brazilian people.

With that said, the Brazilian economy may be ready for a comeback.  Despite the lingering recession, Brazilian markets have rallied to a surprisingly strong position over the last several months, and the real has now appreciated 23.8% against the dollar this year.  The IMF has even projected a return to growth as soon as next year, and Foreign Minister José Serra used this weekend’s BRICs summit to announce that the Brazilian central bank is prepared to finally lower interest rates in the next few months.  Such bright indicators in Brazil’s economic outlook offer a glimmer of hope behind a lackluster political landscape.

Despite all this, the essential question for US-Brazil policy remains unchanged: how stable is the Temer administration and what implications do post-impeachment changes in the Brazilian political economy have for US foreign policy?

So what happened?

2016 saw Rousseff impeached and removed from office.  Though  prosecutors officially cited her involvement in an illegal accounting practice (known in Brazil as pedaladas fiscais), many saw the proceedings as a response to her alleged involvement in last 2014’s giant Petrobras scandal or simply to her governing style, which her opponents felt was ineffective.  Still others have gone so far as to accuse impeachment prosecutors of fomenting a “coup” against a legitimate government on purely politically grounds.  Indeed, chief detractor and leader of the impeachment movement, Eduardo Cunha, former speaker of the lower house and member of the opposition PMDB party, would later himself be prosecuted for receiving millions in kickbacks from the same Petrobras scandal.

The impeachment is still a controversial topic in Brazil, and President Michel Temer is far from popular.  The Brazilian polling agency Ibope has recently found a disapproval rating of 55%, and found that 68% of Brazilians do not trust their new president.  Low popularity aside though, events over the last few weeks have shown considerable pro-administration support at the municipal and congressional levels.

Temer’s Mandate

Last month’s municipal elections dealt a major blow to Rousseff’s Worker’s Party (PT), while strengthening the Brazilian Social Democracy Party (PSDB) and Temer’s PMDB.  As a litmus test both for the 2018 presidential elections and for the current administration’s ability to pass legislation, this bodes well for the PMDB.  Though Temer has committed to not running for reelection in 2018, his success over the next two years will prove to be a crucial determinant for his party’s future.  

Most recently, Temer and his newly appointed Finance Minister Henrique Meirelles found success in their efforts to cut government spending.  Brazil’s current debt to GDP ratio of around 70% isn’t egregious by international standards, but constant increases in state spending have led to consistent annual deficits of near 10%, and international bodies such as the IMF have long called for cuts.  In response, the Temer cabinet has drafted the Proposed Constitutional Amendment 241 (PEC 241), which places a ceiling on government spending for the next twenty years by severing many items’ indexation to GDP growth.  Most elements of public spending will continue to be adjusted based on the previous year’s rate of inflation, but the PEC has received considerable criticism for limiting real growth in the areas of health and education.  These two sectors, constitutionally guaranteed to grow in tandem with the Brazilian GDP, will not make any gains in real terms for the next twenty years under PEC 241.  The dual-track nature of both the Brazilian health care system and the Brazilian school system still reveals major discrepancies in quality between public and private facilities.  The proposed amendment would only directly affect the users of public institutions -- in other words, the poor.

Even so, the bill has already passed Brazil’s Lower House by a vote of 366 to 111.  The bill may yet change over the next few months, but if the overwhelming support it has received in the lower house is any indication, it will most likely pass through the senate without much trouble.  Temer has noted that his next move will be passing legislation to downsize the extremely burdensome Brazilian pension system, but such support may prove difficult to muster.  Brazil currently spends a whopping 13% of GDP, and congress even attempted to expand pension payments last year.

Global corporations have taken all this news in stride, interpreting Temer’s actions as favoring their interests in Brazil, and Brasilia has done much to encourage foreign investment.   

Amidst such newfound stability and pro-business policy, the question remains: how will all of this affect US-Brazil relations?

The US and the Brazilian Question

Several weeks ago, the new  Foreign Minister José Serra outlined ten central guidelines for Brazil’s new foreign policy.  Serra highlights the importance of clean energy and a dedication to human rights, two elements that may be interpreted as a reaffirmation of Brazilian “soft power” in anticipation of a return to the global stage.  Additionally, he notes the need for strengthening of ties with “traditional” Western partners but gives priority to “new partners,” especially in developing Asia.  

US-Brazil relations took a big hit following the very public leak of US espionage in 2013, however, Brazil’s recent return to semi-stability and economic openness  marks an auspicious opportunity for bilateral rapprochement.  There still exists considerable room for deepening connections.  Though the United States is Brazil’s second largest trade partner (and Brazil the US’s ninth largest), the two countries still have no preferential bilateral trade agreement.  If Temer truly seeks to boost Brazilian competitiveness and economic openness, he will not shirk the chance to tighten ties with the US.  

That said, the next US president will have to tread lightly.  Temer is an unelected President with the kind of unpopularity that gets one booed at the Olympics.  Vice-President Joe Biden’s recent remarks at the North American CAF conference indicate a strong willingness to cooperate with the current government and broaden the scope of relations. The two goals may not be in opposition, but achieving US foreign policy goals in Brazil in the near and medium term will require the White House and the State Department to tread cautiously.

Notes

Pedalada Fiscal is the name used to describe the National Treasury’s illegal practice of deliberately postponing repayments to public and private banks in an effort to make government accounts appear more financially stable.

_________

Edmund Ruge is Lead Fellow at the Met Society. Follow him on Twitter @edmundruge