Brazil: Another parliamentary session to decide on governability - Rabobank

Confirming the expectations, the Lower House of Brazil recently voted to reject the request of the General Prosecutor's Office (PGR, in Portuguese acronym) to put President Michel Temer on trial at the Supreme Court (STF, in Portuguese acronym), notes Mauricio Oreng, Senior Brazil Strategist at Rabobank.

Key Quotes

“A decision in the other way around (i.e. authorizing the continuity of the case) would have led to a temporary (i.e. 6-month) leave of the president, conditional on the STF’s decision (as to accepting it or not).”

“There were 263 votes favouring the status-quo, 227 votes for a trial at the STF, as well as 2 abstentions and 19 absentees. Nearly all of the 21 “blank/missing” votes could be taken as backing the government1, yielding a total (broad) support of more than 280 MPs. In terms of actual votes, while the pro-government figure fell in the mid-range of expectations, the outcome stood short of some (rather optimistic) projections published during the day.”

“Financial markets have room to keep seeing the bright side of things (as had been the case lately), as recent voting was seen as a proxy for the type of Congress support the government might have to pass constitutional reforms.”

“Possible interpretations of large government support in recent voting by the market could raise further the perceived (and priced) odds for approval of key macro reforms.”

“The outcome was positive for the government in the end, as President Temer was able to dispel another threat to his term. However, as far as the execution of reforms go, there are still risks to monitor ahead.”

“According to the speech of a number of government officials after latest voting, the government sees itself ready to restart the discussions on economic reforms with Congress, a process interrupted by the episode of May 17.”

“Our baseline scenario still counts on the approval on (at least) a few items of the pension reform - just enough to muddle through until the next presidential election (2018) with lesser risks of another leg of economic deterioration. However, we still have to wait for the next chapters (in coming weeks), in order to have a better assessment on the odds for the execution of reforms. In our view, the Brazilian economy is not out of the woods yet.”