Weekly Economic Briefing

Temer tantrum

23 May 2017

Back
 

There are few comparably large, investable countries where political risks are as consistently high as in Brazil. Having just impeached a president at the end of last year and with a former speaker of the lower house in prison, Brazil is a country where the threat of political upheaval presents a consistent risk to the growth outlook. In the latest development, a Brazilian newspaper reported that meat-packing conglomerate JBS disclosed a list of the bribes they paid to politicians over several years and released tapes of recorded conversations with prominent politicians, including a conversation with President Michel Temer. The tapes showed that Temer was aware of JBS's alleged efforts to thwart an investigation (including bribing justice officials) and the company told prosecutors that bribes were paid to Temer on several occasions. The news sent Brazilian assets tumbling with equities down 9% and the Real dropping 8% (see Chart 10).

Country risk
Confidence at risk

What makes Brazil unique is not that corruption exists, but that Brazil possesses an independent judiciary capable of investigating even the highest levels. While undoubtedly positive for the long-term outlook, the combination of systemic corruption and an independent judiciary can contribute to a short-term lack of policy continuity. In this respect, Brazil differs from other EM economies such as China or India in that domestic political risk is far less predictable. In both China and India, stamping out corruption has been identified as core objectives; but their methods of eliminating corruption create far fewer risks to policy continuity and actually serve to bolster reform efforts. China and India are leading anti-corruption efforts from the top of the political establishment; while this means that there is little transparency and systemic corruption may continue to exist, it also presents limited risk to key reformers.

Just as Brazil's economy started to show positive growth, the scandal increases risks around Brazil's positive momentum. The outlook for reforms has deteriorated markedly, particularly around crucial pension and labour reforms. The political leadership of Temer until now has been vital to overcome opposition, but the scandal undermines Temer's position leaving less political capital to pass unpopular reforms. Brazil's economy has been recovering following a long and deep recession: confidence among both business and consumers had been improving (see Chart 11) and Brazil enjoyed a positive terms of trade boost as the price of commodities rebounded. Furthermore, with inflation falling, the central bank was poised to slash interest rates which would further stimulate economic activity. The current political upheaval threatens this recovery by raising uncertainty and reducing confidence, which can impact on business investment and consumer spending. Additionally, as the scandal now threatens fiscal consolidation, the overall amount of monetary easing could be less than initially expected due to a weaker currency and less-than-expected disinflation. Overall, the fallout from the scandal will ultimately depend on how the scandal plays out; a quick exit by Temer would be substantially better than a prolonged political fight to stay in power. While the economic impact is hard to assess, at a minimum the latest saga is a reminder that Brazilian country risk remains elevated.

Alex Wolf, Senior EM Economist

 
Back
 

The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

Any data contained herein which is attributed to a third party ("Third Party Data") is the property of (a) third party supplier(s) (the "Owner") and is licensed for use by Standard Life**. Third Party Data may not be copied or distributed. Third Party Data is provided "as is" and is not warranted to be accurate, complete or timely. To the extent permitted by applicable law, none of the Owner, Standard Life** or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Past performance is no guarantee of future results. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates.

**Standard Life means the relevant member of the Standard Life group, being Standard Life plc together with its subsidiaries, subsidiary undertakings and associated companies (whether direct or indirect) from time to time.