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Brazil rocked by new scandal: Update

18 May 2017, 8.30 pm GMT

Brazil rocked by new scandal: Update

Adds Temer remarks in fifth and sixth paragraphs.

Rio de Janeiro, 18 May (Argus) — Alleged proof of corruption engulfed the investment-oriented presidency of Michel Temer yesterday, threatening economic reforms and reviving political uncertainties just as Brazil is starting to emerge from a deep recession.

The scandal could chill investor sentiment in the oil patch ahead of three upstream licensing rounds planned for the second half of this year.

Brazil's oil industry recently began to regain momentum after faltering in the wake of the 2014 oil price collapse and the eruption of a widespread corruption case centered on state-controlled Petrobras. The country has become a major non-Opec producer since huge sub-salt deposits were discovered offshore just over a decade ago.

Since taking over from former president Dilma Rousseff a year ago, Temer has moved swiftly to enact economic reforms, including a relaxation of local content requirements for oil projects and the elimination of Petrobras' sub-salt operating mandate. The reforms piqued investor interest, but the fresh revelations could short-circuit the reform agenda, and even truncate his abbreviated presidency that is supposed to end in December 2018.

In a short feisty speech this afternoon, Temer said he will not step down. "I did not buy anyone's silence," he said from Planalto presidential palace in Brasilia. "This situation of uncertainty cannot persist for long. I demand a thorough and very rapid investigation...I will not resign."

Brazil's supreme court authorized federal prosecutors' request to open obstruction of justice and corruption investigations into Temer, suggesting that if he were to resign, he would risk imprisonment.

According to the allegations that surfaced yesterday, the chairman of Brazilian meatpacking giant JBS, Joesley Batista, secretly recorded Temer in March 2017 requesting a bribe for former lower congressional house speaker Eduardo Cunha, who was arrested in October 2016 in connection to the Petrobras scandal, in exchange for his silence.

The sting operation against Temer, former opposition presidential candidate Aecio Neves and their intermediaries was allegedly orchestrated by federal police, advancing the three-year-old Lava Jato probe that has already ensnared top businessmen and dozens of political leaders from most major parties.

"President Michel Temer never solicited payments to obtain the silence of ex-congressman Eduardo Cunha," the president's office said late yesterday, asserting that an early March meeting between Batista and Temer did not include compromising dialogue.

Not surprisingly, opposition congressmen are pressing for impeachment, a process that took down Rousseff in August 2016. The stocks of Petrobras and other Brazilian firms that trade abroad took a hit this morning.

If Temer is forced out, current lower house speaker Rodrigo Maia, a member of Temer's Democratic Movement Party (PMDB), would assume the presidency. But calls are growing to amend the constitution to allow snap elections instead, a unpredictable scenario. With the country's political elites tainted by scandal, non-traditional political figures from the left and right are starting to resonate.

This morning, federal police carried out searches at private residences and the congressional office of influential opposition politician Neves, who shortly after had his senate mandate suspended by the supreme court.

Neves and his intermediaries also allegedly requested around R2mn in bribes from Batista in order to silence potential state witnesses, claims he denies. Federal prosecutors are seeking his arrest, pending a supreme court ruling.

Representing the center-right Social Democracy Party (PSDB), Neves lost to Rousseff in the 2014 presidential election.

Oil companies, particularly majors such as Shell that is Brazil's largest private-sector oil producer, tend to take the long view in such situations. But the unfolding political crisis could sow caution among incumbents and newcomers alike in the onshore and post-salt and two sub-salt auctions planned scheduled to begin in September. The government is counting on the auctions to bring in hefty signing bonuses, revenue it needs to mend the economy.

Temer replaced Rousseff on a temporary basis in May 2016 after impeachment proceedings moved to the senate. Rousseff was definitively removed from office in August 2016 on claims of illegal fiscal maneuvers.

Temer's unpopular pro-business agenda has further divided the country amid a historic recession. Labor and social security reforms the embattled president has managed to move through a factious congress have pushed Temer's approval ratings into the single digits.


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