Agenda On Hold: Temer's Brazilian Economic Reform Stalls Amid Scandal

U.S.-listed Brazilian stocks crashed this week amid fears that another political scandal will result in the impeachment of President Michel Temer.

Temer, who ran on a platform of economic reform, has been in office for less than a year, but a new report by Brazilian newspaper O Globo has accused Temer of paying off a potential witness in an ongoing graft probe.

Temer was allegedly caught on tape discussing cash payments to former Brazilian speaker of the house Eduardo Cunha. Investors had been hopeful that Temer’s economic agenda would bring an end to a period of political turmoil in Brazil, but they are now concerned that the Temer presidency will simply be more of the same.

Related Link: President Temer Bribery Report Is Crushing Brazil

Temer’s potential impeachment battle could also derail much of his legislative agenda, Height Securities analyst Shrey Verma said. The Brazilian government planned to play an active role in the bankruptcy restructuring of Brazilian telecom giant Oi SA, but those efforts may now be placed on the backburner, Verma said.

“In our view Temer has lost significant political capital in the last 24 hours with the release of the audio recordings and his administration would have to restore political equilibrium to advance any legislation in Congress,” Verma added. “Moreover, in the current political environment, the government would be expected to direct its limited resources towards pension and labor reforms that enjoy priority over legislation aimed at the telecom sector.”

After crashing more than 17 percent on Thursday, the iShares MSCI Brazil Index (ETF) EWZ has bounced back by more than 5.7 percent on Friday.