BRAZIL-Temer's approach and objectives

Score one for reason

Today’s headline in the Economics section of the daily Estado de São Paulo was that the “market” (i.e. some influential private sector analysts) approves Temer’s economic team but wants to see some concrete proposals.

This comes on the heels of a press conference by Finance Minister Henrique Meirelles in which he clearly stated that no one knows as yet the depth of the hole dug by the PT in the national accounts and that rather than announce measures that will not be fully successful, the administration wants to finish its evaluation of Brazil’s economic situation before considering specific actions.

I met today with a high-level source to see what is really happening in the administration and my conclusion is that Meirelles is right! The source told me that it is a fact that no one knows the actual status of the fiscal accounts. In fact, in the same section of the Estado today was a report that the 2016 deficit, currently estimated at R$96 billion, could be on the order of R$150 billion vs. the R$100 billion amount originally feared.

If Temer has to ask the Congress (and he does) for a relaxation of the fiscal accounts target for 2016 he is right to wait for the correct number so as to have to ask only once. You certainly remember that the Rousseff administration had to change the target several times in a given year.

In fact, delays in requesting a change were the basis of some of the charges in the impeachment document (i.e. the so-called pedaladas).

Temer has commissioned audits of key expense programs, most especially the showcase programs such as Minha Casa – Minha Vida(MCMV) and Bolsa Família.

There are rumors that numerous government employees are drawing income maintenance monies from the latter and that other beneficiaries are gainfully (and well) employed at salaries that exempt them from the need for income support. MCMV has been rumored to be replete with “real estate speculation” in which an individual will buy several homes under a number of names to re-sell the homes to others who would not qualify for the subsidized housing program.

If Temer can identify and eliminate such practices, he can possibly make the programs far less onerous to the fiscal accounts and avoid across-the-board cuts.

Since Temer’s choices seem so far to be between cutting expenses or imposing additional taxes, both of which are unpopular measures, it is worthwhile to wait for the results of the audits that might make the burden of adjustment somewhat lighter for all.

My source also confirmed an observation I made re Temer’s objectives in the personal area. The source confirmed that Temer sincerelywants to go into history in heroic fashion. He wants to be the guy who led Brazil back from the worst economic crisis in its history. He affirmed that Temer does not want to run for the presidency in 2018. (Even if he did, if he is not successful in creating the conditions for a turnaround he probably would not get elected anyway!)

In short, it would appear that the administration is on the right track. Instead of reacting in knee-jerk fashion to what is unarguably a very tense situation, the economic team is acting prudently.

In fact, with regard to concrete actions, it should be noted that Temer fired 324 federal employees in just 3 days into office and replaced all of the service personnel in his office with persons whose loyalty he trusts. He has removed any sources of inside intelligence to Dilma Rousseff or Lula. He doesn't need an "Edward Snowden" running around his office!

Former president Lula is hovering over the administration like a vulture waiting for its “meal” to draw its last breath. Temer cannot afford to make a mistake and doesn’t need to run that risk. 

The combined efforts of Lava-Jato and the audits of federal expense accounts should be sufficient to at least clarify the actual situation of the economy and provide a better field of vision to allow for the development of specific measures.

The more transparent Temer can be with regard to the administration’s findings, the better his chances of getting popular support for otherwise unpopular measures. It’s proper crisis management and he needs to make sure that stakeholders (i.e. voters) are informed of both good and bad news.