Another week and another wave of corruption scandals hits Brazil.
On Monday, police busted an alleged R$500m bribery scheme involving bus lines and a former powerful state governor of Rio de Janeiro, Sérgio Cabral, who is already serving time for myriad other offences.
At the same time, they arrested on suspicion of corruption a former minister of Brazil’s president Michel Temer, who is himself facing graft charges and a vote in congress this month on whether the supreme court should be allowed to try him.
Yet far from rattling investors it seems capital markets no longer care very much about the deterioration of the country’s political scene into a B-grade television crime show.
The São Paulo stock market plunged more than 10 per cent in mid-May when news first broke that Mr Temer had allegedly discussed bribes with a businessman, Joesley Batista, the former chairman of JBS, the country’s largest meatpacker.
But since then it has been relatively stable, even recovering some of its lost ground, while the currency, the real, after briefly weakening about 8 per cent to nearly R$3.38 to the dollar has steadied at about R$3.30. The Ibovespa, the benchmark equities index, is still up about 5 per cent this year while the real is down about 1.4 per cent.
This is mild compared with what many thought would happen should the Temer government lose its way. Brought to power last year by the impeachment of former leftist president Dilma Rousseff, Mr Temer promised to introduce tough fiscal reforms.
For a while, it seemed he might even succeed. He persuaded Brazil’s unwieldy congress, a political zoo with 28 parties, to pass a bill limiting increases in Brazilian federal budget spending to zero in real terms. This was a revelation for a country that spends like a European welfare state but delivers only a fraction of the services.
To fund the change, he needed to also overhaul the country’s generous pension system, which allows people to retire as early as in their 50s. He seemed on track to do this when the JBS scandal broke, effectively scuppering his plans.
Yet earlier expectations that the foundering of the pension reform would mean cataclysm for Brazilian markets have proven overdone.
One reason for this is that the economic team appointed by Mr Temer, led by finance minister Henrique Meirelles and central bank president Ilan Goldfajn, both of whom have extensive private sector experience, is regarded as first class.
True, the economy was already nearing the bottom when they took over after two years of the worst recession Brazil has ever seen. But they have carefully helped to restore confidence. Inflation is at 10-year lows of 3.6 per cent with a survey of economists by the central bank predicting it will fall further by the end of the year.
The benign inflation figures prompted the government to lower the centre of its inflation target from 4.5 per cent to 4.25 per cent by 2019 and 4 per cent in 2020 last week. “The decision . . . contributes to an environment of sustained reductions in interest rates,” Itaú Unibanco chief economist Mario Mesquita said in a report.
Likewise, Brazil’s current account deficit has fallen to lows, with a cumulative 12-month gap of just 1 per cent of gross domestic product in May. This and the country’s large foreign exchange reserves have helped protect Brazil against external shockwaves during the recession.
For Alberto Ramos, economist at Goldman Sachs, Brazilian markets were steady due to a “still favourable external environment, still very credible and orthodox economic team (if they cannot do it, who can?), and the fact that the alternatives to this administration are not great or well defined”. But he warned things could change if governability continued to decline.
The other factor helping Brazil is that, on the external front many of the Latin American country’s other emerging market competitors do not look any better off.
“In the land of the blind, the one-eyed man is king,” said Alejo Czerwonko, emerging market strategist at UBS Wealth Management. He said Brazilian sovereign bonds in dollars paid more than their South African or Turkish counterparts yet its political situation was no worse than theirs. He liked selected sovereign and corporate bonds and the currency “at this level”.
Any tightening of global liquidity could still bite Brazil. But barring that, as long as Mr Temer’s economic team keeps a steady hand at the helm, it seems investors will be willing to weather the political storms ahead.
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