In October, Brazil’s 5,570 municipalities held elections to appoint mayors and city councils. Yet given that the local ballot constituted the first electoral test after the disputed impeachment of then-President Rousseff in late August, the election was mainly seen as a national popularity poll. In this context, clear setbacks suffered by Rousseff’s centre-left Workers’ Party (PT) have bolstered the position of the new government of President Temer. Indeed, while the PT saw the number of municipalities under its control decimated (from 630 to 256), Temer’s own Democratic Movement Party (PMDB) did relatively well. Despite losing some municipalities, it retained control of more than 1,000 (which is more than any other party), thus proving overblown the fears that corruption charges against many PMDB lawmakers would more significantly undercut the party’s performance. Moreover, the centre-right Social Democracy Party (PSDB) – which is the PMDB’s main partner in Temer’s coalition – made significant gains in the polls, especially in urban areas. Of the so-called G93 (93 municipalities with more than 200,000 voters that together represent 40% of the national electorate and the bulk of GDP), the PSDB now controls 28 cities (up from 19 before the election). Strikingly, the PT – which in its heyday controlled 25 of the G93 – now managed to secure only one. 

Impact on country risk

The better-than-expected electoral showing of the PMDB and the gains achieved by its main coalition partner PSBD clearly constitute positive news for President Temer. That is because his government is now in a strengthened position to push for the reforms that are deemed necessary to help lift the economy out of recession. Yet while GDP is indeed expected to return to growth as of next year (after shrinking by 3.8% in 2015 and 3.3% in 2016), the improved outlook clearly remains subject to significant downside risks. To highlight one, note that the anticipated rebound in investor confidence hinges on fiscal consolidation (the government deficit surpassed 10% of GDP in 2015 and will again this year). To this effect, the administration has drafted a bill to limit the growth of public expenditure to the rate of inflation for the next 20 years. Yet while this spending cap looks likely to be approved by Congress shortly, other meaningful reforms (in particular related to labour markets and the pension system) will prove much more difficult to implement in the run-up to the general election in 2018. As such, in the near future, fiscal consolidation measures may primarily take the form of divestment of state assets. Indeed, the government has recently published a list of 34 airports, roads, railways and other infrastructure whose control will be offered to private sector companies in auctions in 2017 and 2018.

Analyst: Sebastian Vanderlinden, s.vanderlinden@credendogroup.com