Focus turns to reforms after Brazil votes to impeach Rousseff
The impeachment of Dilma Rousseff had been widely expected. The prospects for Brazilian assets now rest on economic fundamentals and much-needed reforms.
1 September 2016
With a greater-than-expected majority, Brazil’s Senate voted to impeach President Dilma Rousseff, removing her from office after her suspension in May. Rousseff is replaced as president by Michel Temer, who has been acting on an interim basis during her suspension.
Rousseff’s impeachment had looked increasingly certain and so it is unlikely that yesterday’s vote will result in a significant rally in Brazilian assets. If anything, some profit taking is likely in the initial response. The prospects for Brazilian assets from here are now dependent on economic fundamentals and the ability of Temer’s government to enact sorely needed reforms.
Economy on the mend
On growth, yesterday’s GDP data confirmed the continuation of Brazil’s longest recession since the 1930s. However, there are signs that the economy is on the mend. The private sector appears to be recovering, with investment growth turning positive on the quarter, and household consumption slowing its precipitous decline.
The investment revival follows the turnaround in business confidence, triggered chiefly by hopes of Rousseff’s removal and the policy reforms that might follow under Temer.
Reform progress is crucial
Clearly then, there are risks, with much riding on one man. President Temer and his government have been linked to the ongoing corruption scandal at Petrobras, which has metastasised also to Eletrobras. There is a chance this undermines Temer’s government as it undermined Rousseff’s, weakening its ability to implement reform.
In addition, a number of reforms have already seen dilution. This might just be electoral calculation ahead of local elections in October, but investors would do well to keep one eye on developments here as a signal of the government’s commitment to reform.
Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.