Brazil crisis: finmin to stay even if Temer goes

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Friday, May 19, 2017

Brazil's finance minister Henrique Meirelles (pictured) reportedly said he will remain in his post and keep pushing ahead with structural reforms, even if President Michel Temer is forced to leave office due to a corruption scandal.

Local daily Folha de S. Paulo reported that Meirelles has reassured investors and allies that his job is not at risk by the scandal that is now threatening to bring down Temer, although he believes Temer will be able to ride out the storm. The paper did not reveal how it obtained the information.

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The scandal is centered around a private phone conversation between Temer and Joesley Batista, chairman of Brazilian meatpacking group JBS, which has now secured a plea bargain deal with federal prosecutors.

Batista recorded the March conversation in which Temer encouraged the JBS executive to continue paying monthly bribes to ensure the silence of former lower house president, Eduardo Cunha, who was arrested in October for his involvement in the massive Lava Jato corruption scandal.

The recorded conversation was first published by local newspaper O Globo and late Thursday, the release of the audio was authorized by supreme court minister Luiz Edson Fachin.

Temer has denied any wrongdoing and has so far resisted calls for his resignation.

INVESTOR CONFIDENCE AT RISK

Meirelles is considered by investors and analysts to be a fundamental part of the Temer administration's strong commitment to market-friendly reforms, including a major reform of the pension system.

The reforms are seen as necessary to restore investor confidence and the health of the country's public finances, and to regain investment grade status.

Brazil is expected to emerge this year from a deep two-year long recession, but the recovery is very fragile and local economists only expect a GDP expansion of around 0.5% for 2017. The fresh scandal now threatens to derail the reforms and throw Latin America's largest economy back into recession.

"It's clear that the governability risks will interrupt the reform agenda with a retracement back to the initial skepticism of the pre-reform agenda when President Temer first assumed the presidency last August," said Siobhan Morden, head of Latin America fixed income strategy at Nomura.

"There is still broad based support for economic reform; however the election cycle has accelerated forward with distractions potentially postponing any progress on the already controversial pension reform until after the 2018 elections and an even weaker Temer administration that focuses more on political survival versus an unpopular reform agenda," Morden added.

After facing strong opposition, even from allied parties, the government has made changes to the original draft of the pension reform. Originally, the government was planning to establish a minimum retirement age of 65 years for men and women. But it later amended it to 65 years for men and 62 for women. It also increased the minimum contribution period for retirement benefits to 25 years from 15 years currently.

The lower house is expected to vote on the pension reform in June and Meirelles urged lawmakers earlier this month not to delay this vote since it may hurt investor confidence and the economic recovery.