Impeachment sends Brazil's economy into storm winds

Dilma Rousseff (Eraldo Peres, AP)
Dilma Rousseff (Eraldo Peres, AP)

Sao Paulo - Strong winds are forecast for Brazil's already turbulent economy and there's no chance of sunshine before resolution of President Dilma Rousseff's impeachment battle, market observers say.

Volatility is the key word as Brazil's Congress embarks on what could be months of intense debates over the fate of the unpopular leftist president, whose second term so far has been plagued by deep recession and a giant corruption scandal at the heart of the political and business establishment.

The initial reaction to the launching of the impeachment process last Wednesday was a euphoric jump in the Sao Paulo stock market, up five percent at one point before closing with its best performance of the year up 3.29%.

Markets are disappointed with Rousseff's managing of the economy. Brazil is in deep crisis now, with inflation more than double the government target of 4.5%, a GDP shrinking 4.5% year-on-year, and unemployment rising inexorably.

Many investors would welcome the impeachment of Rousseff, who leads the Workers' Party, because the constitution requires she be replaced by her centrist vice president, Michel Temer, from the coalition PMDB.

Temer is "much more acceptable to the market than the Workers' Party government of Rousseff," said Paulo Gomes, chief economist at Azimut Brasil Wealth Management, citing Temer's expected ability to enact reforms breathing life into the economy.

"Investors would very much like to see a more neo-liberal politician, different to the Workers' Party," said economist Felipe Queiroz, predicting "a lot of instability" on the stock market.

Although impeachment itself would be traumatic, Brazil would "come out stronger" in the long term, said Andre Leite, economist at TAG Investimentos.


However, the flash of enthusiasm was quickly tempered by fear of uncertainty as Brazil's slow-moving train wreck accelerates, with no clear idea of which way it will turn.

Despite that initial bump, Ibovespa, the main Sao Paulo index, closed the week 2.23% lower. The real also failed to maintain its post-impeachment announcement gains. So far this year the currency has lost about a third of its value against the dollar.

"Brazil needs economic stability," Gomes said. "Many support impeachment thinking that it will improve the economic situation in the country. But this is not guaranteed and in the short term it will make the situation even harder, because it will cause problems with passing economic reforms."

Now the main hope for the presidency appears to be that the impeachment fight ends quickly. A win could mean coming out with a renewed mandate and authority.

"The impeachment is going to bring more clarity. Instead of being a threat hanging over us, we will confront it. When we confront things, it's generally better," Finance Minister Joaquim Levy said Friday.

Levy said he looked forward to demonstrating "our objectives, our policies. This is what the government wants to do."

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