Brazil's New Government Has 90 Days to Save the Economy from Chaos

Oren Kesler

Economics, Brazil

Momentum is on their side, but the hardest is yet to come.

Over the last several years, Brazil has gone through political and legal turmoil that has polarized the public into warring camps, revived forgotten fears of a latter-day military coup, and reignited racial and economic discourse in a way not experienced for an extended period of time.

Despite the overwhelming support enjoyed by the pro-impeachment campaign, the process itself proved to be slow and painful—and can be viewed as a traumatic event for Brazil’s institutions and society as a whole. The country now finds itself wounded and facing the same problems as before—only now there is no prominent figure like Rousseff to absorb the public’s blame and anger.

The new government led by President Michel Temer—Rousseff’s former deputy—has minimal room for error or even to adapt. The public’s expectations are high, and the government is expected to provide impossibly immediate solutions to Brazil’s deep problems.

Crucial Days Ahead

The Temer government’s first challenge will be to restore investors’ trust and confidence in Brazil’s economy. Temer’s appointments of Henrique Meirelles as Minister of Finance and Ilan Goldfajn as President of the Central Bank are indeed a step in the right direction, and have been welcomed among Brazilian and foreign investors alike.

However, a full economic recovery could prove to be an unexpectedly difficult challenge. In the first quarter of 2016, Brazil’s GDP shrank by 1.44 percent relative to the fourth quarter of 2015—and by 6.27 percent compared to the first quarter of 2015. Overall, Brazil’s economy is set to shrink by 3.7 percent this year.

The GDP figures, however, only provide a partial picture of the depth and magnitude of the current crisis. Recently released data shows that unemployment has risen faster than previously thought, with more than 11.1 million (10.9 percent of the workforce) now looking for jobs. This figure represents a quarter-on-quarter increase of nearly two percent. If that wasn’t enough, inflation is on the rise—going from 9.34 percent in mid-April to 9.5 percent in mid-May.