Vote on Brazil President Graft Trial Key Gauge for Reforms

(Bloomberg) -- Brazil’s lower house will decide whether to put President Michel Temer on trial on Wednesday in a vote that will show how much power he has left to drive an economic recovery in his last fourteen months in office.

For the second time since the beginning of August the Chamber of Deputies is to determine whether to send charges filed against the president to the Supreme Court, a move that would suspend Temer from office and could lead to his permanent removal. This time, he stands accused of obstruction of justice and criminal conspiracy. Two of his cabinet ministers face similar charges.

While Temer’s allies are widely expected to secure enough votes to shelve the charges, investors will be looking closely at the margin of support. With further austerity measures planned, including cuts in pension spending, a simplification of an archaic tax code and a reduction in the size of the state, the outcome of Wednesday’s vote will indicate whether these ambitions are still viable.

"The result will be key to find out the size of the coalition and what we’ll be able to vote," said Beto Mansur, the government’s deputy leader in the lower house. "Tax reform is doable," he added, without ruling out chances of success elsewhere.

Early on Wednesday opposition legislators protested outside the plenary while defense lawyers, prosecutors and legislators debated the charges. Many members of the ruling coalition were hesitant to show open support for Temer, meaning it took around seven hours for the government to reach a quorum.

Adding to the tense situation in Brasilia, the president was hospitalized as lawmakers gathered in the house. Temer had a bladder catheter inserted after doctors diagnosed a urological blockage. He is currently resting and will be released later on Wednesday, according to a statement by the presidency.

If the lower house votes to clear Temer on Wednesday, he faces no further charges.

Diminishing Returns

Yet the president has already spent much of both his political capital and a discretionary slush fund to weather a five-month corruption scandal. As next year’s general election moves closer, legislators are becoming more hesitant to defend a president with low single-digit approval ratings who proposes further belt-tightening after the country’s worst recession on record.

After rallying to record highs earlier in the month the Sao Paulo stock exchange has leveled off in recent weeks, while the currency has eased in line with other major currencies against the U.S. dollar. Many investors have down-scaled their expectations of an aggressive reform agenda going forward.

"The consensus is that the president will get fewer votes in his favor, underpinning a division in Congress that could make it more difficult to stir the economic recovery during the electoral process," Emy Shayo, a Brazil equity strategist, and others from JP Morgan wrote in an Oct. 24 research note to clients.

As a result, any vote above 257, or 50 percent of the total number of deputies, in favor of Temer would be seen as a positive, according to the bank’s analysts. In August, 263 lawmakers voted to shelve the charges against him.

With public coffers almost empty, Temer has had little cash to influence legislators, forcing him to rely on other kinds of favors. In an attempt to coax Brazil’s large rural caucus into supporting him, the president offered discounts of 60 percent on 4.6 billion reais of unpaid environmental fines, according to O Globo newspaper. In return, recipients are to offer services to improve the quality of the environment.

He also tweaked legislation to tighten the definition of working conditions that Brazilian law describes as "analogous to slavery". The prosecutor general called the decision a "setback to basic rights" and Supreme Court Justice Rosa Weber subsequently granted an injunction, suspending the measure.

Opposition Tactics

The opposition hopes for 342 votes against the president on Wednesday, according to Julio Delgado of the Brazilian Socialist Party, up from the 227 it managed in August.

"The government’s victory is not guaranteed," said House Minority Whip Jose Guimaraes of the leftist Workers’ Party.

Even with a decent showing, the government will have to practice some degree of consensus politics if it wants to keep the reform momentum going, said Marcos Montes, head of the 39-member Social Democratic Party in the Chamber.

"The government doesn’t have the strength to do whatever," Fontes told Bloomberg News. "It’ll have to manage carefully to prioritize proposals that are of interest to all."

--With assistance from Eduardo Thomson

To contact the reporters on this story: Samy Adghirni in Brasilia Newsroom at sadghirni@bloomberg.net, Luisa Marini in Brasilia at lmarini6@bloomberg.net.

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Raymond Colitt, Bruce Douglas

©2017 Bloomberg L.P.