It’s not gonna be easy
Michel Temer has two goals to achieve: 1) get the economy back in order and 2) achieve goal 1 with a minimum of kleptocracy.
The first is pretty straightforward and is something with which the traditional kleptocrats are familiar. Whenever Brazil faced economic disarray, the “traditionals” would back off, allow liberal economic principles to take over, get the economy back on track and then revert to type. They realized that to allow the economy to continue to founder was to kill the goose that laid the golden eggs.
For what I presume were ideological reasons, (as well as a heavy dose of administrative incompetence), the PT could not accept this approach. Its model of a single party in power in perpetuity virtually excluded the possibility of even temporarily reverting to a liberal economic approach to economic disarray. As I wrote in the past, the two models are mutually exclusive.
Temer has a formidable challenge to avoid the same kind of behavior that characterized the end of military control over Brazil. When the military stepped down, the traditional kleptocrats rushed to the trough with abandon and the result was hyperinflation.
Temer has to create a base from which the Brazilian public sector can be made subject to better and more efficient rules of governance the violation of which will expose kleptocracy and allow Lava-Jato to do its work.
He will have to do that with a legislature that is still replete with kleptocrats who offer their support under the old quid pro quorules. Moreover, his 23-member cabinet has 12 members (52%) who are under the Lava-Jato spotlight. He will have to ride herd on the appointments and projects under the supervision of his cabinet and most especially of those who are already suspected of corruption.
A glance at the list of power brokers of the past reveals the same family names and some remaining faces through decades of rule. Even Temer himself has come under investigation.
However, Temer is also a seasoned and discreet politician and is now in his mid-70s. He appears to want to enter history in heroic fashion and has stated that he has no intention of assuming the presidency in 2018. He also appears to recognize the need for a “democratic left” in Brazilian politics (something new in this part of the world) to keep the political playing field level.
He also has stated that he supports a parliamentary form of government and that will certainly require a more professional legislature most likely elected via district representation. Brazil currently has 35 political parties and it is simply inconceivable that there are 35 distinct political ideologies. The parties are designed simply to get their members elected to the “free lunch” associated with kleptocracy.
He will not have time to carry out all the necessary reforms in just two years so he will have to create a base from which a less kleptocratic system can evolve. If he can at least disarm a wounded and angry radical wing of the PT he will have taken a giant step forward. From that point forward, it will be up to the Brazilian electorate to make things happen.
The economy is in such dismal shape that as yet the new administration has no real notion of the size of the problem. Finance Minister Henrique Meirelles this morning presented some new members of his financial team and he was quick to say that before announcing any “programs” he will have to have a correct assessment of the depth of the hole that the PT dug over the past 13 years and the last 5 in particular.
That’s a good sign. The administration is hesitant to undertake any initiatives that could end in frustration as often happened in the previous administration.
Temer has an “image problem” with the public. He is associated with the kleptocracy of the past and the public is concerned for a return to the status quo ante during his presidency. However, if Temer’s concern is, as described above, for his legacy the “image problem” will gradually dissipate.
That is clearly not in Lula’s interest and while he is now licking his wounds, he you can expect him to return to the public spotlight to try to stymie Temer’s efforts as 2018 approaches.
The fact that the “Bolivarian” states of the region have come out supporting the claim that Dilma’s impeachment is little more than a “putsch” will help to enhance the new administration’s image. The fact that the mainstream international press, principally the Guardian and the NYT, also (naively in my view) hinted at the same view could prove embarrassing. They now enjoy some rather uncomfortable company!
As I stated often in the past, economic recovery in Brazil is likely to occur faster than the institutional reforms necessary to ensure curbing kleptocracy. I suggest that you, as investors, follow the cautious approach outlined by Meirelles in this morning’s press conference.
Unless you perceive an opportunity “too good to refuse”, proceed carefully and keep your exposure under tight control. The fact that optimism is currently rising is not necessarily a good indicator of long-term opportunity. As my friends in New Jersey would say, “You watcha you ass”(-ets)!
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