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 muchneeded reforms.

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.

Craig Botham – Emerging Markets Economist – Schroders