Brazil's interim President Michel Temer (right) stands with the new Economy Minister Henrique Meirelles on May 12, 2016 in Brasilia, Brazil.Igo Estrela/Getty Images
The way Brazil's suspended president Dilma Rousseff tells it, her political opponents' efforts to undermine her rule and remove her from office are to blame for the country's deepening economic crisis.
Political turmoil is never a plus for an economy. But the truth is that it was her own policy failings and dismal economic and fiscal record that left Brazil in worse shape than at any time since the Great Depression, drove her popularity ratings to record lows and paved the way for her impeachment trial.
Buoyed by the prospect of her ouster and a more business-friendly replacement, investors have been loading up on Brazilian equities and bonds since late January. The stock market has been one of the world's best performers – the benchmark index is up almost 30 per cent so far this year – despite an economy running in reverse gear. The battered currency, the real, climbed by more than 20 per cent against the U.S. dollar in the three months to the end of April.
Interim President Michel Temer is saying the right things to bolster market confidence, with promises to cut government spending, privatize a slew of state-controlled companies, reform the costly pension system and shrink the size of the cabinet by about a third.
But all of this is easier said than done. Even if Mr. Temer manages to avoid being felled by the spreading corruption probe (he's under investigation), he will still have to overcome sharp divisions in the legislature and will have a tough time peddling austerity in the midst of a severe slump.
That task will fall to his new high-profile finance minister, former central bank chief Henrique Meirelles, who presided over monetary policy during Brazil's boom years. Since leaving his bank post at the end of 2010, the inflation hawk has been a vocal critic of profligate public spending, as the budget deficit widened from 2 per cent of GDP in 2010 to 10 per cent last year.
Mr. Meirelles may be a popular choice to steer fiscal reform. But he won't come equipped with a magic growth wand for an economy forecast to shrink 3.6 per cent this year. Following a decline of 3.8 per cent in 2015, Brazil is facing its worst two-year performance in more than a century. Serious cuts in social spending would put a further dent in the economy.
As it is, economists predict negligible growth next year, while inflation remains north of 7 per cent. That could prompt the central bank to further tighten monetary policy. The current benchmark interest rate is an investment-dampening 14.25 per cent.