Dilma Rousseff Impeachment Is Just the First Step to Heal Brazil’s Broken Economy by Cyrus Sanati @FortuneMagazine April 18, 2016, 3:31 PM EDT E-mail Tweet Facebook Linkedin Share icons The impeachment of Brazilian President Dilma Rousseff may be unfair, but it’s not unjust. Brazil and its broken economy has been weighed down by government incompetence and corruption for far too long, retarding the nation’s recovery from recession. But the Congressional members who voted on the impeachment measure over the weekend need to take another step in the right direction if they want to regain the trust of the Brazilian people and foreign investors; they should impeach themselves. Nearly half of Brazil’s Congress is either under investigation or has been charged with graft in connection with one of the various corruption scandals that have been plaguing the country for the last two years. Change needs to come to all levels of Brazilian government before the economy can move forward. Brazil’s economy seems to be in a violent tailspin. Growth first stalled in 2014 and then contracted by a whopping 3.8% in 2015. Unemployment has rocketed to around 10%, with youth unemployment now hovering around 20%. Meanwhile, wages are down 2.5% on the year, while inflation is up nearly 10% during the same time. So, not only are people getting paid less, things are getting more expensive, which makes people feel both frustrated and poor. Brazil’s currency, the real (pronounced “Hey-I”), fell as much as 30% against the U.S. dollar in 2015, trading at around four reals to one U.S. dollar for most of the year. In 2011, the rate was around 1.5 reals to one U.S. dollar. Oh, how the mighty BRIC has fallen. Back in 2011, few would have predicted that Brazil’s economy would soon be in for a slowdown, let alone a depression-level contraction. But by 2013, fear that China’s economy could be in for a “hard landing” sent the entire emerging market complex into a nasty dive. The panic soon became self-perpetuating, with a reduction in foreign capital leading to a slowdown in economic growth and a drop in commodity prices, which then led to investor confirmation of an economic downturn, which in turn led to more capital flight, and so on. Many of the investors who fled emerging markets returned once the panic subsided, picking up some great bargains along the way. But many investors chose to remain on the sidelines after major protests erupted in Brazil in June 2013. Fund managers who had stuck by Brazil during the initial downturn in the emerging markets found it hard to reinvest in the country as millions of Brazilians rioted in the streets, shutting down ports, blocking roads, and creating traffic jams. Outrage at the government for raising transit fares earlier that year snowballed into a protest of everything by everyone with no clear leader or agenda. Among the dozens of protest causes were transportation costs; Native Indian rights; government spending on the 2014 World Cup and the 2016 Summer Olympics; corruption in state and local governments; and a bill in the Brazilian congress that would authorize psychologists to try and “cure” homosexuals. Brazil’s government quickly moved to right many of these wrongs to placate the people and show investors that they had things under control, starting first with the low hanging fruit. They dropped the transportation surcharge, said a few nice things about the Natives, and trashed that anti-gay bill. Meanwhile, Brazil’s finance ministry took steps to attract more foreign capital by removing some barriers for investors. It eliminated a 6% tax foreigners had to pay to invest in Brazilian local bonds and then cut a 1% tax on currency derivatives in a bid to stabilize the real exchange rate. The riots eventually subsided, but the fallout was severe. Foreign direct investment in Brazil never really recovered, dropping from a peak of around $64 billion in 2013 to around $56 billion in 2015. The drop was partly due to a dip in commodity prices and the strengthening of the U.S. dollar. But investors from London to New York have told Fortune that they won’t invest in Brazil because of its political instability. The government’s failure to tackle the big underlying problem—deep rooted corruption and mismanagement in Brasilia—was “distressing,” said one fund manager who trades sovereign debt. Brazil’s independent courts have helped to move things along. Prosecutors began to uncover a string of corruption scandals in 2014 and 2015, involving both private and state-controlled companies, like Petrobras, the nation’s oil and gas champion, as well as current and former elected officials—namely, the former president of Brazil, Luiz Inácio Lula da Silva. Rousseff has not been implicated in any of the scandals, although she may have made one all on her own when she created a cabinet position for Lula da Silva in an effort to shield him from prosecution. Rousseff’s impeachable offense was for playing fast and loose with the nation’s budget; essentially fudging the numbers to make the budget deficit look smaller than it really was. Now, this was apparently standard practice in Brazil as most of, if not all, of Brazil’s former presidents had done the same while they were in office. But Rousseff’s recent actions, shielding her former boss from corruption charges, was viewed by many in the government, even in her own party, as simply unacceptable. Investors now have a choice to make. The major Brazilian stock index, the Bovespa, has largely recovered from last year’s lows on anticipation of a Rousseff impeachment. But while the impeachment of Rousseff may have been a necessary condition to bring Brazil back to the market, it is hardly sufficient. The dark clouds of corruption, suspicion, and civil unrest continue to hover over Brasilia, threatening to derail the country’s economy and sending investors packing once again. Rousseff’s potential successor, Brazilian Vice President Michel Temer, is a member of the centrist PMBD party, which is considered more business friendly than Rousseff’s leftish Worker’s Party (PT). Temer would most likely shift the nation further to the right, reining in spending while raising revenue through mass privatization of government-controlled entities, such as utilities. But Temer isn’t well known outside of Brasilia. Only 1% of Brazilian voters would support him if he were to run for president, according to a recent poll. With such weak support, it would be difficult for him to calm unrest in the country. Furthermore, as Rousseff’s Vice President, Temer could face the same charges for cooking the country’s books, even if he had nothing to do with it. Many will argue that Brazilian investments “look cheap” given its weak currency and raw potential. But if that were all a region needed to ensure success, sub-Saharan Africa would be an economic powerhouse. At the turn of the century, Argentina ranked as one of the 10 richest nations in the world and was viewed as an emerging giant that could eclipse Europe. Now look at it. The point is, governance matters, and right now Brazil’s government is a mess. So, while it is tempting to invest in Brazil now that change seems to be afoot, there’s still a great deal of uncertainty on the horizon. Take Petrobras, for example. The quasi-state-controlled oil company has new leadership and its stock has been crushed amid the shake up and corruption charges, down as much as 70% from its peak during the boom years. Given all this, investing in the oil giant seems like a no brainer, especially if you believe oil prices are set to rise. But with Temer talking about privatizing state assets, the future of Petrobras is sketchy at best, even if oil prices rebound. The company may be forced to issue equity to stay afloat, diluting current shareholders. Or it may be forced to pile on the debt, hurting current bondholders. And who knows what people will find once the government is finally out of the picture. But at least Petrobras has taken the first step in wiping its management slate clean—how long until Brazil’s government does the same when it holds new elections? Anthony W. Pereira, a professor and the Director of the Brazil Institute at King’s College London, described a disturbing scenario in a piece for Fortune where former President Lula takes advantage of the political chaos to run for president in 2018 (provided he is not prosecuted or otherwise barred from running). Brazil needs a new leader who can rebuild the government’s trust with the people of Brazil and foreign investors alike. It would be a shame if Brazil “peaked” in 2011. It has so much more to offer the world.