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Analysis
Light beyond the gloom in Brazil

Light beyond the gloom in Brazil

As Dilma fights for life, the markets look for change

by David Smith in Buenos Aires

Thu 14 Apr 2016

In a week when the International Monetary Fund diagnosed two years more of zero growth for Latin America, the escalation of Brazil’s constitutional crisis shows how the markets are betting on political change to end the region’s economic malaise.

Next door in Argentina a final settlement with creditors from the country’s default in 2001 signals the return of Latin America’s second-largest economy to international capital markets. Argentina will start talking to potential investors about its $15bn megabond next Monday, reports strong appetite in London and New York, and plans to settle the debt by Friday week.

‘The big picture, despite the crisis in Brazil, is that the markets see opportunity in Latin America, in some contrast to Asia and certainly to Africa,’ according to a leading fund manager in Miami. ‘If Brazil’s president is impeached, the belief is that the next government has to be more pro-market. So the picture is not all gloom and doom, especially given Argentina’s settlement; there is expectation of change.’

The numbers in Brazil fall into two categories. First, if 342 members of the lower house vote for the impeachment of President Dilma Rousseff on Sunday, reaching a two-thirds majority, the Brazilian senate can suspend her within a matter of days. This on the charge that she distorted the true level of the fiscal deficit before she won narrow re-election in late 2014.

The other category of numbers is this: the fiscal deficit has skyrocketed under Dilma’s leadership. It’s close to 11% of GDP, exposing the world’s seventh-largest economy in freefall. This week’s spring meetings of the IMF and World Bank in Washington will ponder an expected contraction of Brazil’s economy of around 3.8% this year, the same as 2015, with a staggering 90% of spending channelled into subsidies and entitlements.

Yet the markets tell a different story. Dilma’s crisis has triggered a 30% jump in the Bovespa stock market index in Sao Paulo over the past two months, with the real rebounding by 15% against the dollar, having fallen 40% over the previous year.

Petrobras, the state oil giant embroiled in a bribery scandal that has engulfed the business elite and the political establishment, has doubled its market value in the past few weeks, despite a mountain of debt and record losses.

‘A new government would almost certainly take the shackles off Petrobras and let it become increasingly privatised,’ says one of Brazil’s best-known bank chiefs. ‘The markets believe this is the moment for Brazil to clean house, change direction, return to fiscal responsibility, growth, and be pro-market again. Petrobras could be the poster boy of change and opportunity.’

Whatever those hopes, the forecasts from Washington this week do not make light reading. The World Bank and IMF see Latin America shrinking economically by 0.3-0.7% this year, with Brazil and Venezuela leading the downturn.

The bright spots are in Mexico and Central America, with their close ties to the recovering US economy, and Chile, Peru and Colombia, growing at 3-4%. But Brazil is the heavyweight, with the GDP of Sao Paulo province alone double that of Argentina. At a tumultuous time, with the president fighting for her political life, Brazil is showing that economic solutions require political change – and this seems on the way. In Brazil there is light beyond the gloom.

David Smith, OMFIF Advisory Board member, represented the UN Secretary-General in the Americas, 2004-14.

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