Former Treasury Secretary Larry Summers spoke earlier this year at a series of economic breakfasts co-sponsored by City National Bank. Among his more poignant observations was, “The next right decision that Brazil makes about its economy … will be the first right decision it makes about its economy.”
Point well taken.
Brazil, which is preparing to host the Olympics this summer, has been a slow-motion train wreck since early 2014. The government mismanaged financial capital inflows headed Brazil’s way from major economies in the wake of the Great Recession, as investors searched for higher yields when G10 central banks drove interest rates to the bottom. As those funds pulled out, Brazil was left with high-priced debt, a weak currency to pay back that debt, inflation and a central bank with no leeway given the current situation.
And then there is “Operation Car Wash.” Named after a gas station allegedly used for illegal currency exchange and money transfers, this is an investigation into corruption at the state-owned oil company Petrobras that has engulfed several senior government officials.
The investigation is now closing in on both former President Lula da Silva and current President Dilma Rousseff. This week, President Rousseff’s largest coalition partner pulled support for her government, which seemed to clear the way for an impeachment process to proceed.
In light of all that, this may come as a surprise: Brazil’s stock market is currently the best-performing market in the world – up nearly 20 percent after having lost nearly 42 percent of its value in 2015. The Brazilian currency is also the best-performing currency in the world – stronger by about 9.5 percent after having lost 33 percent of its value in 2015.
Clearly, there is a disconnect here.
One explanation that does hold weight is the fact that commodity prices seem to have found a bottom, and Brazil is very dependent on commodity exports. But another major part of this is the simple fact that markets are pricing in a change in government. Brazil’s vice president – who would become president if Rousseff resigns or is removed – is considered more business-friendly and centrist.
But given the recent dramatic price action, you have to wonder if markets are not getting a bit ahead of themselves.
My View: Markets clearly swing from one extreme to the next. That is not new. And yes, the markets are getting ahead of themselves in terms of high expectations. But I have to admit that Brazil at least looks like it is about to finally start making the right decisions about its economy.
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