Exclusive: Brazil's Temer says unemployment, not graft probe, biggest worry

By Anthony Boadle and Lisandra Paraguassu

BRASILIA (Reuters) - Brazil's priority this year will be job creation as its economy emerges from the worst recession on record, President Michel Temer said on Monday, dismissing speculation that key labor and pension reforms could be derailed by a corruption scandal.

In an interview with Reuters, Temer said that Latin America's largest economy would exit a two-year recession in the second half this year but it would take longer to reduce the ranks of Brazil's 12 million unemployed as companies use idle capacity before hiring new staff.

Eight months after taking over from impeached leftist Dilma Rousseff with a vow to restore fiscal discipline, former vice president Temer has pushed through measures to rein in public spending and provide credit to small- and medium-sized companies.

Inflation has slowed significantly but economic activity has yet to pick up. Investor confidence has been shaken by corruption allegations against politicians, including Temer's allies, cabinet ministers and the president himself.

Temer's popularity has languished, prompting unions and Rousseff's ousted Workers Party to threaten street protests.

"We will have to focus carefully on unemployment. That is our main worry, and that requires economic growth," Temer said in his office in Brasilia's futuristic Planalto presidential palace.

"Brazil will start growing again in the second half of the year. The prospects are that GDP for the year as a whole will not be negative."

Ahead of the inauguration of U.S. President-elect Donald Trump this week, Temer said there was no sign that a more protectionist stance in the world's top economy would have any negative impact on Brazil.

Temer, a veteran lawmaker known for his cautious and methodical approach, forecast no change in trade and investment ties with the United States, Brazil's second-largest trading partner after China.

Despite his weak poll ratings, Temer's center-right government retains a comfortable majority in Congress. He voiced confidence the coalition would approve a major overhaul of the costly pension system this year, raising the minimum retirement age to 65.

On average, Brazilians currently retire at 54, placing a major strain on creaking government finances.

"This is a government of reforms, preparing the country for the next government," said the 76-year-old leader, who casts himself as a caretaker president and will not seek re-election in 2018. "We are focused on getting Brazil back on track. And we still have two years to do that."

NO CHANCE OF OUSTER

As a sign of returning investor confidence, Temer pointed to the recovery of share prices for state-led companies.

State-run oil company Petrobras , which is at the center of the country's biggest ever corruption scandal, has seen its stock price more than double since Temer took office as its new management has aggressively pursued asset sales to reduce its debts.

However, allegations that Temer received campaign donations in 2014 from graft money liked to the Petrobras scandal have raised doubts whether his government will survive until elections next year.

Temer said there was "zero" chance of him being toppled by the corruption investigation, code-named Operation Car Wash.

Plea bargain statements by executives of Brazil's largest engineering firm Odebrecht - expected to name up to 200 politicians who received bribe money - do not help "stability" but would not paralyzed the legislative agenda or cause splits in the coalition, Temer said.

"We are not concerned at all," he said. "There isn't the slightest chance of that."

The allegations against him have either been cleared up or relate to legally registered campaign donations, he said.

With 25 years experience as a lawmaker, Temer has restored fluid dialogue with Congress, overcoming the gridlock that paralyzed Rousseff's administration and led to her impeachment.

However, the Supreme Electoral Court (TSE) is probing whether to invalidate the Rousseff-Temer ticket from 2014 for receiving illegal funds.

Temer said a ruling would take a long time and the case presented against Rousseff by the centrist PSDB party - which now forms part of his government - could be dismissed.

(Reporting by Maria Pia Palermo, Daniel Flynn, Lisandra Paraguassú and Anthony Boadle)

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