Political Scandal Might Lead To Economic Opportunities

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What's going on?

Brazil’s stocks, bonds and currency have jumped significantly in value over the past 10 days or so. The dramatic recovery in commodity prices has helped but most the of the focus has been on the possibility that the President would lose her job.

What does this mean?

Brazil’s currency is now up 10% versus the US dollar this year and its stock market is up 25%. But the turnaround hasn’t been due to any improvement in its economy. It’s been mainly because former President Luiz Inacio Lula Da Silva has been indicted by prosecutors (sort of) in relation to the ongoing Petrobras scandal that has engulfed the country. Current President Dilma Rousseff is a protégé of Da Silva’s and many think his indictment will ultimately lead to Rousseff, somehow, being ousted from the President’s office. Many say that the economic policies originally championed by Da Silva and continued by Rousseff have made Brazil’s economy worse (they, for example, include a lot of government spending). Investors seem to think that a new government is more likely to turn things around.

Why should I care?

The bigger picture: Politics and economic mismanagement can pose very real risks. It was easy for the government to spend a lot of money when Brazil was booming – but it can’t afford it when the economy is struggling so badly. It’s meant a deeper downturn and, probably, a more painful period of adjustment than was necessary.

For markets: “Emerging market” bonds are becoming a popular investment again. For the past few years, investors have shied away from buying government bonds of “emerging” markets like Brazil because a country going through an economic collapse is a lot less likely to be able to pay back its debt. But Brazil managed to sell some debt last week and others, like Argentina, are likely to sell a lot of it later this year. Investors will demand fairly high interest rates for the government bonds to compensate for the risk, but things at least appear to be improving enough for investors to start investing again.

Originally posted as part of the Finimize daily email.

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