What's going on?
Brazilian stocks and the country’s currency got absolutely walloped on Thursday (tweet this) following the eruption of a new scandal involving its president.
What does this mean?
About a year ago, Brazil was just beginning to find its feet after a massive political scandal rocked the country. Its then-president was impeached and many senior corporate figures in the country were jailed. Coupled with the commodity selloff of 2014-15 (Brazil is a big exporter of commodities like iron ore and oil), the country’s economy underwent a severe contraction, from which it has only just begun to emerge.
The current president, Michel Temer, took over the reins a year ago and initiated an economic reform program that has been largely credited with helping the economy recover. But now that he has been accused of corruption, investors fear that the turmoil will derail Brazil’s fragile recovery.
Why should I care?
The bigger picture: Political turmoil usually hurts economic growth.
For one, the instability that comes from political scandals is damaging, as companies are less likely to invest in expansion if future government policies are uncertain. Corruption also dents investors’ confidence: if it looks like market-friendly regulations might be shelved because of political upheaval, international investors will likely take money out of the country (as was already happening in Brazil on Wednesday). The damage, ultimately, is done to citizens who live with an economy that would otherwise be much stronger.
For markets: Emerging markets have had a fantastic run this year – so far!
Stocks in emerging markets have performed significantly better than stocks in developed ones so far this year. They have, however, had a rough last few days, partly due to the wider market turmoil – but also because of Brazil’s brewing scandal, which has reminded investors that emerging markets tend to be riskier than developed economies.