Bruno Araújo resigned from his post as minister of Cities. Araújo was one of four ministers representing the centrist PSDB (Brazilian Social Democracy Party). The resignation is a sign of a rift between the embattled president Temer and one of his most powerful coalition partners. A reason for the conflict could be that the PSDB is likely to stand its own candidate for the presidential election in October 2018. Hence, many of the PSDB want to distance themselves from the deeply unpopular Temer government to better their chances at the polls. Temer chose Alexandre Baldy, from the Progressive Party, to be the new minister of Cities.  

Impact on country risk

After the departure of Araújo, Temer is seeking to secure political backing for the pension bill. The decision to swear Alexandre Baldy in is likely a move designed to please the Progressive Party which has 40 seats in the chamber. The cap on pension spending is a flagship proposal of Temer to rein in fiscal expenditure. Indeed, despite some fiscal reforms, the fiscal deficits remains relatively elevated (at an expected 9.2% of GDP in 2017), swelling the relatively high public debt (expected at 83.4% of GDP in 2017). Also in the future, relatively large fiscal deficits are expected, likely pushing the public debt to close to 100% of GDP in 5 years’ time. The pension reform was first presented to Congress a year ago and has since then already been watered down several times. The stakes are quiet high for Brazil. The failure to approve even a watered down pension bill could have an important impact on the economy. Next to aggravating the fiscal situation and trigger sovereign downgrades by rating agencies, it could put pressure on the currency, spur inflation, tighten the monetary policy and decrease the positive growth prospects (expected at 1.5% in 2018).

Analyst: Jolyn Debuysscher, j.debuysscher@credendo.com