December 21, 2016 / 2:52 PM / 3 years ago

Brazil's Temer boxed in by recession, political crisis: analysts

SAO PAULO (Reuters) - Brazil’s President Michel Temer is increasingly likely to depend on lower interest rates and an unpopular agenda of legislative reforms to revive a moribund economy, analysts said, as a deep recession risks entering a third year.

Brazil's President Michel Temer gestures during a ceremony for the release of resources for Technical Education and Promotion of Schools in Integral Time, at the Planalto Palace in Brasilia, Brazil, December 20, 2016. REUTERS/Ueslei Marcelino

Temer’s best chances to spark growth lie in quickly pushing through Congress an unpopular pension reform unveiled this month. If his program wins approval, that would help the central bank cut interest rates at a faster pace, according to analysts.

However, there is growing skepticism about Temer’s ability to give a significant boost to the economy and his popularity by the end of his mandate in 2018. Add to that the anxiety that Brazil’s political turbulence, stoked by a sweeping political corruption probe, will not abate.

The current Brazilian president has lost four ministers due to corruption allegations. That along with the prolonged economic recession have threatened his political survival and given rise to calls for him to step down and allow new elections.

“The economic and political crises have been feeding each other. The government has not been able to break that cycle,” said Carlos Melo, a political scientist at the Insper institute.

Analysts see a narrowing window of opportunity for Temer.

The campaign for the 2018 presidential election is likely to interfere with political strategies in Congress in the second half of next year, analysts said, leaving little time for any rate cuts to have an effect over the economy, given its usual lag.

Each 0.25 percentage point cut in the benchmark interest rate, currently at 13.75 percent, contributes to economic growth by 0.1 percentage point, according to Alessandra Ribeiro, an economist with Tendências Consultoria.

And political risk may offset that effect, she said, by raising lending spreads by banks.

For nine straight weeks, economists in a central bank poll have cut their forecasts for economic growth next year to 0.58 percent. Brazil’s gross domestic product is expected to shrink by more than 3 percent for a second year in 2016.

The Finance Ministry and the central bank have recently announced a series of measures to reduce credit costs and cut bureaucracy. But the government has shied away from offering subsidies or raising spending as it struggles with a record budget deficit.

“The government’s honeymoon with markets and analysts is practically over,” said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics. “2017 will be a complicated year and it is hard to imagine the economy moving out of where it is now.”

Writing by Silvio Cascione; Editing by Jeffrey Benkoe

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