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30/03/2006 | Brazil: Brazilian Finance Minister Resigns Amid Corruption Allegations

WMRC Staff

Brazilian Finance Minister Antonio Palocci stepped down yesterday following mounting pressure for his resignation over a corruption scandal; Brazilian President Luiz Inácio Lula da Silva has accepted his resignation and appointed long-term ally Guido Mantega as his successor.

 

Global Insight Perspective

Significance

Antonio Palocci is the second senior member of the government to resign over corruption allegations, after the president's former Chief of Staff, José Dirceu.

Implications

Palocci's departure is not expected to lead to a marked change in economic policy, but it will be a severe blow to President Luiz Inácio Lula da Silva, who has consistently held up the economy as one of his government's principal successes.

Outlook

Although a number of candidates from a range of parties will participate in the presidential race, the main contest is likely to be between Geraldo Alckmin as the Brazilian Social Democratic Party (PSDB) candidate and President Lula. Lula is yet to announce his decision formally on whether he will stand, but is expected to do so provided that no evidence emerges of direct involvement by him in any of the corruption cases under investigation.

Build-Up to Palocci's Departure

Allegations of irregularities in the award of contracts during Palocci's time as mayor of Riberão Preto first surfaced in August 2005, but they failed to stick. Although Palocci's credibility appeared to be stronger than that of his accusers, there also appeared to be an unspoken consensus in Brazil's main opposition party - the Brazilian Social Democratic Party (PSDB) - at that time that there would be a limit to the investigations into the government corruption scandal that had emerged in June that year. It was believed that any moves resulting in Palocci's departure or even the curtailment of President Lula's presidential term might backfire, damaging the PSDB's election hopes if it was perceived to have destabilised the economy through such a course of action.

Finance Minister Antonio Palocci came under renewed pressure following the publication on 29 October 2005 of a report by weekly news magazine Veja alleging that the Cuban government donated US$3 million to President Lula's 2002 electoral campaign. Under Brazil's electoral law, political parties are forbidden from receiving financing from international donors. The Cuban government and the Cuban embassy in Brazil both denied the allegations, and the Worker's Party (PT) threatened legal action against the publication. The report, which provided no evidence to substantiate its claims, was based on comments by two of Palocci's former aides, including Rogerio Buratti, who was also responsible for allegations against Palocci in August about irregularities in the award of contracts during his time as mayor of Riberão Preto. Three former aides of Palocci were subsequently implicated in allegations concerning the channelling of funds from Angolan donors to finance Lula's presidential campaign. In addition, Palocci saw a cabinet colleague, Chief of Staff Dilma Rousseff, take advantage of his perceived weakness to describe his economic policies publicly as 'rudimentary' and call for higher public spending. The twin pressures even led to local press reports claiming that the finance minister had tendered his resignation, a claim that was subsequently denied. The allegations also led to an 'invitation' for him to testify before the congressional commission (CPI) investigating the bingo scandal, an invitation he finally took up in early 2006 . Pressure on Palocci appeared to ease after Lula gave assurances that Palocci would remain in office until the end of his administration, describing him as 'indispensable'. Palocci's testimony before the Senate Economic Affairs Committee on 16 November and before the bingo inquiry on 27 January were also well-received by the markets.

The latest calls for Palocci's resignation come after a witness testifying at the CPI into the bingo scandal - Francenildo dos Santos Costa, the caretaker of a mansion hired by Palocci's aides and allegedly used for meetings to hand out funds obtained through corruption and to hold parties with prostitutes - on 16 March contradicted Palocci's earlier testimony in January, in which he denied visiting the house . The witness said that he had seen Palocci there on numerous occasions. A ruling by the Supreme Court in support of a request by a PT senator stopped the testimony on the grounds that the questions being asked by the CPI were outside its remit, but the damage had been done. Allegations that Palocci had lied in his testimony to the CPI were bad enough, but calls for his resignation have increased in the past few days following leaks to the press of confidential bank account details belonging to the witness . On 23 March, the PSDB submitted a request to the Chamber of Deputies that Palocci be impeached.

Outlook and Implications

Lula's administration has been beset by corruption allegations since June 2005, weakening the government and tarnishing the ruling PT's reputation as a more ethical party than its peers. Although a number of legislators have lost their jobs as a result of the scandal, key figures in the government have escaped relatively unscathed, with the exception of the president's former Chief of Staff, José Dirceu, who lost his job and was later impeached. The finance minister's departure will therefore be embarrassing for the government. Dirceu was considered 'dispensable', since his departure would not have serious repercussions for political and economic stability. However, Palocci's departure is more controversial. Palocci has been key in cementing investor confidence in the economic management of the Lula administration and is widely regarded as a 'safe pair of hands'. Previous calls for his resignation in August and November last year triggered market volatility, with more concern about his possible successor than his departure.

Unusually, the International Monetary Fund chief - Rodrigo de Rato - issued a response to the change of personnel, praising Palocci's achievements during his period in office and expressing his support for Mantega. Standard & Poor's also released a brief statement, saying that 'Finance Minister Palocci's polices embedded prudence but, in our view, this was government policy and not the minister's personal strategy'.

Indeed, there is little doubt that the key tenets of macro-economic management will remain unchanged:

The target for the primary fiscal surplus has been set at 4.25% of GDP (or above) since 2003, in a move designed to rein in total public debt and underpin investor confidence. The administration has consistently outperformed its targets in this regard.

Although lacking formal autonomy, the central bank has been given sufficient freedom to set monetary policy appropriate to achieving its inflation targets . These are set by the monetary policy council - as opposed to the monetary policy committee (Copom), which makes the decisions on interest rates - on which Mantega will sit, as finance minister. The council fixes the inflation targets that Copom must then pursue.

The exchange rate will continue to be determined primarily by market forces. However, U.S. dollar purchases by the central bank - ostensibly to build foreign reserves, but with the useful side-effect of weakening the real - are set to continue.

In a statement immediately following his appointment, Mantega said that the government would make 'every effort to bring down interest rates more and more'. This spooked some observers, since it suggests that Mantega could use his position to secure more rapid rate reductions than Copom would be inclined to implement if left to its own devices. Indeed, in comments made in late 2005, he said that the monetary authorities had demonstrated 'excessive zeal' in their approach to tacking inflation, and his background suggests that he has more interventionist inclinations than his predecessor. While planning minister, he opposed the outright privatisation of state assets, instead championing private-public partnerships. He also went on record with criticisms of budget cuts that had been ordered by Palocci. However, in a telling remark, the new finance minister said yesterday that 'economic policy will not change. The economic policy we are practicing is not Minister Palocci's but the president's.' Vice Finance Minister Murilo Portugal - with whom Palocci had worked closely - also left his post yesterday, reportedly upset at having been passed over for the top job.

Lula is unlikely to sanction any significant changes in fiscal or monetary policy. He and his wingman, Palocci, did not stand firm in the face of fierce and protracted criticism of tight monetary and fiscal policy - not least from within the ruling PT itself - only to change direction at this stage. Furthermore, the allegations made with regard to Palocci's actions in recent months undermined the government's reputation with the electorate - if not the markets - and his replacement brings to an end months of uncertainty. Markets did indeed wobble yesterday as it became clear that Palocci was on his way out. However, the Bovespa stock index actually closed 0.17% higher at 37,641 points, while the real ceded just 0.7% to close at 2.18:US$1. The news of Palocci's departure came after Brazilian markets had closed. Although there may be further volatility in asset prices today, further assurances from Mantega and Lula that it is 'business as usual' should allow relative calm to return.

The sustained pressure on Palocci over the past two weeks reflects not only increased confidence in the stability of the economy, but also a renewed onslaught by the PSDB against the government after finally selecting its nominee for presidential candidate, Governor of São Paulo Geraldo Alckmin, rather than the city's mayor, José Serra, who was ahead of him in the polls. The contest between Alckmin and Serra over the candidacy was perceived by the party to have had a negative effect on poll results in the preceding weeks, with the party's internal divisions distracting it from keeping pressure on the government and allowing President Lula to recover ground in the polls. The PSDB's participation in the campaign for Palocci's departure is an indication that it is using the corruption allegations to step up pressure on the government and try to reverse Lula's gains in the polls. According to a report in Jornal do Brasil yesterday, the PSDB's new strategy is to focus on the nucleus around Lula, with the campaign against Lula possibly to be followed by pressure on others close to the president who have also been the focus of corruption allegations, including his son. In a further sign that this year's election campaign is set to be a dirty one, there were reportedly allegations of corruption levelled against Alckmin over the weekend (25-26 March).


Contact: Raul Dary

24 Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

www.globalinsight.com and www.wmrc.com

WMRC (Reino Unido)

 


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