Tough economic outlook in Brazil after president removed

Two dramas that grabbed global attention - the Olympics in Rio de Janeiro and the removal of Brazil's president - have now concluded, but the South American country is far from answering the biggest challenge facing the country: How can Latin America's largest economy climb out of a deep recession?

Brazil's economy shrank 3.8 per cent last year and the International Monetary Fund is forecasting it will shrink another 3.3 per cent this year. Brazil's unemployment rate hit 11.6 per cent in July, up from 8.6 per cent a year ago. And the budget deficit is on pace to reach almost US$48 billion by the end of this year.

Much of the grim news snowballed over the last year while Congress was consumed by the fight over President Dilma Rousseff's future. On Wednesday, the Senate answered that, voting 61-20 in favour of removing Rousseff from office for breaking fiscal laws in her management of the federal budget.

For some, that is cause for hope that things can turn around.

"The economy hit the bottom of the barrel under Dilma and the PT (Workers' Party)," said Marcelo Teixeira, a 28-year-old high-school teacher in Sao Paulo.

'Dysfunctional

political system'

Some analysts believe that with Rousseff's fate resolved, companies that had held back because of political uncertainty may begin investing. But there are also widespread fears that Brazil's political troubles are too great to be overcome by just replacing Rousseff.

"Even with (Rousseff's) removal, you still have a very dysfunctional political system in Brazil," said Monica DeBolle, a senior fellow at the Peterson Institute for International Economics in Washington.

On Wednesday, Brazil's government said the economy continues to shrink, posting its ninth consecutive quarterly contraction.

The country's statistics institute says that gross domestic product slipped 3.8 per cent in the second quarter of this year, compared to the same time frame of 2015.

Opponents accused Rousseff of mismanaging the federal budget and neglecting to make needed changes as the economy began slowing down.

Some economists believe the nation has already weathered the worst.

Investment slightly recovered by 0.4 per cent this time after 10 negative quarters. Stock prices have risen slightly, likely because commodity prices have stabilised.

Rousseff's successor, Michel Temer, 75, took over on an interim basis in May when the Senate voted to impeach and suspend Rousseff. He was sworn in as Brazil's new leader Wednesday and will now serve out the remainder of Rousseff's term.

While he has put forward an ambitious reform agenda, DeBolle said Temer will face huge obstacles in getting his programme enacted in the short time he has before the country's next presidential election in 2018.

"People will see him as a lame duck and he will face a very difficult political environment," she said.

To curb soaring budget deficits, David Fleischer, a professor emeritus of political science at the University of Brasilia, said Temer will need to cap government expenditures by implementing a variety of austerity measures, from reforming the pension and social welfare system to controlling salary increases for government workers.

Those moves will likely meet resistance in Congress from lawmakers reluctant to vote for reductions in such areas as the country's pension system. To calm anxieties, Temer's government on Monday issued a statement saying it did not plan to do away with the poverty-reduction and social programmes instituted by the Worker's Party over the past 13 years.

The statement denied that Temer wanted to raise the retirement age to 70 or 75 or eliminate sick pay, measures that have been floated. His office also said it would not privatise offshore oilfields or revoke a series of labour laws.

Lucca Mendes, an 18-year-old student at Sao Paulo's Casper Libero College, is sceptical.

"Things will get worse for the working class. Prices will rise even more, and more and more people will lose their jobs," he said.

There are some signs of hope. Brazil's stock prices have risen slightly this year on investors' belief that the worst of the economic downturn is over because commodity prices, a lifeline for Brazil's economy, have stabilised. The IMF, in its July update, revised up its forecast for 2017 to predict that Brazil's economy will grow next year by a tiny 0.5 per cent after two years of decline.

Still, it remains to be seen whether modest growth is enough to get on a path to recovery.

"At the moment, Brazil's economy is on very shaky ground," DeBolle said.

Rousseff's removal creates many questions that are not easily answered.

Unimpressed by Temer

Brazilians have already got a taste of Temer's leadership, and they are clearly unimpressed.

In May, Temer took over as interim president after the Senate impeached and suspended Rousseff. The 75-year-old career politician named a Cabinet of all-white men, a decision roundly criticised in a nation that is more than 50 per cent non-white. Three of his ministers were forced to resign within weeks of taking their jobs because of corruption allegations, which also follow Temer and threaten his hold on power.

When Temer announced the opening of the Olympics on August 5, he was so vociferously booed that he remained out of sight for the remainder of the Games.

Rousseff's allies have vowed to appeal her ouster to the country's highest court. While previous petitions to the court have failed to stop the impeachment process, at the very least legal wrangling will keep the issue front and centre.

The decision also leaves many question marks over the economy. Temer has promised to pull the country of 200 million people from its recession by tackling reforms that have long been taboo, such as slimming public pensions.

Speaking to supporters at the presidential residence, Rousseff promised to mount a strong opposition, but didn't elaborate.

"This coup is against social movements and unions and against those who fight for their rights," she said.

Meanwhile, Venezuela says it is freezing diplomatic relations with Brazil and withdrawing its ambassador in response to Rousseff's ouster.

A statement from Caracas calls Rousseff's impeachment and removal a "parliamentary coup" and says the withdrawal of its ambassador is "definitive".

The statement argues that the political process against her violates democracy and Brazil's constitution. It alleges it's part of an "oligarchical and imperial attack" on leftist movements in Latin America.

- AP