Brazil’s economy requires political stability

Now that Brazilian President Dilma Rousseff was impeached for her illegal management of the federal budget and officially replaced by Michel Temer, the Olympic Games break has ended. While only 14% of the Brazilian public opinion has confidence in him, 75-year-old Temer will have to revive the Brazilian economy after shrinking 3.8% in 2015 and sustainably capitalize on rising investor confidence.

Unemployment of 12 million Brazilians (around 11.2% of the labor force in April 2016), public deficit and saving social security are the most urgent issues. If Temer succeeds in bringing political stability and liberalizing the public sector, investor appetite may grow with some caution however. Certainly, commodity prices stabilized and the Brazilian stock market jumped about 60% in dollars (USD) over the last eight months but the macroeconomic data is rather negative with a decrease of 3.3% in real GDP and almost 10% of YOY inflation forecast for 2016, indicating a possible mismatch between the valuation of Brazilian assets and economic reality.

Finally, political risk will remain a major hurdle to the largest Latin American economy as Rousseff has expressed her willingness to appeal her impeachment and the country remains deeply politically divided. The relative proximity of the general elections (including the presidential one) scheduled for 2018 increases such risk.