Political Risks Abound in Brazil

Idiosyncratic risk remains high in Brazil and therefore subject to headline risk. Recent headlines include the criminal charges against the government coalition representative Amaral in the Senate (who would be instrumental in negotiating fiscal adjustments) and the imprisonment of the chairman of BTG Pactual. Both would be implicated in obstruction of justice in the ongoing investigations regarding the Lava Jato scandal in Petrobras. A latest headline is the move to impeach the president by Congress.

  • The acceptance of one of the cases for impeachment of the president by the head of the lower house may have small medium term repercussions and it is not a complete surprise. The case accepted for impeachment is related to a very technical recommendation (not a criminal finding with charges against the president) about the results of the 2015 budget by an auditing body. Note that the decision to accept this case for impeachment was made by the speaker of the House, himself likely to be investigated for criminal acts within the next few days. This would reduce the chances of the impeachment case to proceed. In any case, this has to be approved by a number of investigating committees and commissions before it goes for voting in Congress, where the government coalition is likely to turn it down (it would require 2/3  majority in Congress to proceed to the Senate). If this were to proceed, the president would have to resign for six months in preparation of her defense, being replaced by vice president Temer. The president’s party is also likely to appeal against this case to the Supreme Court. This is probably the less damaging accusation against the president and one which could take many months of voting and vetoing before the courts (at least three instances after congressional recommendations, if this case makes it that far) make a decision. In discussion with locals, including legislators, the expected outcome is that the president could end her term even with the investigation still going on, so chances of her leaving office within 12 months remain under 50% in our base case scenario. On this basis, the impact on the market could be small from this latest development. The one unknown would be a sudden resignation, something which is impossible to predict but which would appear unlikely at this point. We recognize, however, that the ability of the administration to negotiate necessary fiscal adjustments becomes more difficult in this environment.
     

The comments provided herein are a general market overview and do not constitute investment advice, are not predictive of any future market performance, are not provided as a sales or advertising communication, and do not represent an offer to sell or a solicitation of an offer to buy any security.  Similarly, this information is not intended to provide specific advice, recommendations or projected returns of any particular product of Standish Mellon Asset Management Company LLC (Standish).  These views are current as of the date of this communication and are subject to rapid change as economic and market conditions dictate. Though these views may be informed by information from publicly available sources that we believe to be accurate, we can make no representation as to the accuracy of such sources nor the completeness of such information.  Please contact Standish for current information about our views of the economy and the markets.  Portfolio composition is subject to change, and past performance is no indication of future performance.
BNY Mellon is one of the world’s leading asset management organizations, encompassing BNY Mellon’s affiliated investment management firms, wealth management services and global distribution companies. BNY Mellon is the corporate brand for The Bank of New York Mellon Corporation. Standish is a registered investment adviser and BNY Mellon subsidiary.

 

The comments provided herein are a general market overview and do not constitute investment advice, are not predictive of any future market performance, are not provided as a sales or advertising communication, and do not represent an offer to sell or a solicitation of an offer to buy any security.  Similarly, this information is not intended to provide specific advice, recommendations or projected returns of any particular product of Standish Mellon Asset Management Company LLC (Standish).  These views are current as of the date of this communication and are subject to rapid change as economic and market conditions dictate. Though these views may be informed by information from publicly available sources that we believe to be accurate, we can make no representation as to the accuracy of such sources nor the completeness of such information.  Please contact Standish for current information about our views of the economy and the markets.  Portfolio composition is subject to change, and past performance is no indication of future performance.
BNY Mellon is one of the world’s leading asset management organizations, encompassing BNY Mellon’s affiliated investment management firms, wealth management services and global distribution companies. BNY Mellon is the corporate brand for The Bank of New York Mellon Corporation. Standish is a registered investment adviser and BNY Mellon subsidiary.

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