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Market Shudders As Brazil Risks "Succumbing To Fiscal Populism" With New FinMin

Tyler Durden's picture




 

The decision to approve a 2016 budget guidelines bill that targets a 0.5% primary surplus as opposed to a 0.7% surplus may have been the last straw for (former) Brazilian FinMin Joaquim Levy.

Speculation had been swirling for months that Levy’s exit was imminent as Brazil’s intractable political crisis made pushing unpopular austerity measures through Congress all but impossible for the University of Chicago-trained economist.

“In many ways, Levy’s task was daunting from the moment he took office,” Bloomberg notes. “Not only was the country already sliding into recession -- the result of plunging prices for Brazil’s commodity exports and four years of Rousseff’s interventionist policies -- but a corruption scandal emanating from the state-run oil giant was spreading fast.” Here's a look at the recession in historical context:

Well, the nightmare came to an end for Levy on Friday when the finance ministry announced that he would step down and Rousseff announced the confirmation of Planning Minister Nelson Barbosa as the new FinMin.

(Levy and Barbosa)

Barbosa, who holds a PhD degree in Economics from the New School for Social Research in New York and a Master’s degree and BA in Economics from the Federal University of Rio de Janeiro is, to quote Goldman, “an experienced public servant [and] is widely believed to have been one of the intellectual forces behind the so-called “New Economic Matrix” developed and implemented at the Ministry of Finance under former Finance Minister Mantega.”

“In essence” Goldman continues, the idea is that “growth and development will emanate from fiscal expansion, lower interest rates, currency devaluation, trade protection, national content rules and import substitution policies.” Right. So not exactly what the market might have wanted to see in a country that desperately needs to double down on fiscal rectitude.

"Levy leaving is a clear negative," Phillip Blackwood, managing partner at EM Quest Capital LLP told Bloomberg on Friday as the BRL real extended losses and stocks closed at six-year lows. Here's some historical context on the fiscal situation:

Barbosa sought to calm market jitters, telling reporters that he is committed to fiscal adjustment and the countries fiscal goals will not change with Levy’s exit. Obviously that's a bit difficult to believe because if the fiscal goals Levy advocated had been compatible with the direction the government intends to move in going forward, he wouldn't have been forced out in the first place.

For their part, Moody's (which is the last of the big three ratings agencies to maintain an IG rating for Brazil) says Levy's ouster "complicates fiscal consolidation." As a reminder, from Credit Suisse: 

Meanwhile, Eurasia says the President's choice of Barbosa “certainly reinforces [an] increasingly bearish outlook should Rousseff in fact win the impeachment battle."

The new FinMin "now faces the daunting challenge of convincing investors and rating companies that he has the political support and personal conviction needed to shore up fiscal accounts," Bloomberg adds. "While Rousseff says she backs measures to raise taxes and cut spending, her allies are reluctant to tighten the belt amid surging unemployment and shrinking wages." Here's some further color from BofAML: 

Naturally, the focus turns now to the direction of the fiscal policy under the new FinMin, which should affect the recovery in confidence and thus growth. With mounting downside risks to growth that heavily weigh on the government’s revenues and the ongoing challenges in passing fiscal measures in Congress, tangible results over statements will now be needed to improve expectations over primary fiscal results ahead.

 

Monetary policy may feel additional pressures to control inflation expectations under a less intense fiscal contraction, and our perception is that the risk for a hike in January continues to increase. 

 

The continuing depreciation of the BRL should play against inflation expectations also, further increasing BCB’s pressures to deliver hikes ahead. 

So in other words, Barbosa's appointment will put more pressure on the BRL which will in turn force Copom to get more aggressive with procyclical measures to control inflation which is precisely the opposite of the “New Economic Matrix” tenets as outlined by Goldman above. 

In short, this isn't good from the market's perspective and you can bet the BRL and the Bovespa will likely trade lower up to and until Rousseff and Barbosa can establish some degree of credibility when it comes to managing a rapidly deteriorating fiscal situation. On that note we close with one last quote from Goldman: 

Our, and the market’s, main concern is that the complex political picture, the beginning of impeachment proceedings against President Rousseff, and growing pressure from some political parties and social movements close to the government for a new policy direction may lead the administration to, at best, soften its commitment to fiscal austerity, and at worst, succumb to the temptation of fiscal populism.

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Bonus: selected charts from Credit Suisse:


 

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Sat, 12/19/2015 - 14:33 | 6943297 smacker
smacker's picture

Hyperinflation on its way in Brazil under Barbosa. It's already unofficially 15%+.

Brazil always resorts to the same old tried and failed solution: monetary expansion and inflation.

Sat, 12/19/2015 - 14:54 | 6943332 algol_dog
algol_dog's picture

Does this mean the '16 Olympics will not be coming to Brazil?

Sat, 12/19/2015 - 15:09 | 6943360 smacker
smacker's picture

Who knows. There's been so much negative publicity about the games and extortionate hotel prices, I'd guess that many foreign visitors will be thinking twice and maybe give them a miss.

And with all the human sewage floating in Lagoa and Guanabara Bay, anybody taking part in Olympic water sports needs to check their health insurance first.

 

Sat, 12/19/2015 - 15:23 | 6943388 El Oregonian
El Oregonian's picture

New Olympic 2016 contest entry inserted this year: "FinMin human Javelin toss"

Sat, 12/19/2015 - 17:08 | 6943644 max2205
max2205's picture

Where's Milton Friedman when you need him.

 

Maybe the Cee I Aye and Citi can Fuck up ur country again worse than in the 70's 

Sat, 12/19/2015 - 19:37 | 6944236 philipat
philipat's picture

And does this increase confidence in the successful management of the 2016 Olympics? Athletes will already be swimming in shit and paying for their own Air-con. And security for spectators is becomming a real concern.

Will an alternative City (Probably London as all the new facilities are already in place from last time) be available? Available in time? Cancellation?

Sat, 12/19/2015 - 16:47 | 6943579 R.R.Raskolnikov
R.R.Raskolnikov's picture

Something which I did not have heard of and maybe you perhaps know, is how are the citizens of Brazil going to behave towards foreigners when visiting their country during the Olympics? I mean the (rich) capitalists are visiting their country. A lot of people there live in poverty. Would it not be probable that massive riots againts the Olympic tourists occur or at least they will get robbed on a large scale?

 

Sat, 12/19/2015 - 17:03 | 6943630 sgorem
sgorem's picture

fortunately/unfortunately, you don't want to walk down the street in Rio with anything showing you have money. no bling, watch, ear rings, nice shoes, etc. you never go out at night unless you have a SWAT team with you. fade into the crowd if possible, it'll be harder, and take a little longer for the pick pocket artists, muggers, robber/killers to make their way to you. eventually they will. Feliz Navidad, i guess.................

Sat, 12/19/2015 - 18:51 | 6944076 Escrava Isaura
Escrava Isaura's picture

 

 

Feliz Natal.... and not navidad.

 

Sat, 12/19/2015 - 18:58 | 6944104 R.R.Raskolnikov
R.R.Raskolnikov's picture

I do not understand what it means. Any way Mery Christmas!

Sat, 12/19/2015 - 19:03 | 6944118 smacker
smacker's picture

Feliz NatalHappy Christmas.

Feliz Ano Novo = Happy New Year

 

Sat, 12/19/2015 - 19:16 | 6944162 R.R.Raskolnikov
R.R.Raskolnikov's picture

haha oke. Learned something new. Thank you!

Sat, 12/19/2015 - 17:26 | 6943710 smacker
smacker's picture

Brazil is a developing country, not a backward African hellhole.

Plenty of Mercs, BMWs, VWs, Audis and Range Rovers about.

The Games are in Rio where mostly rich and educated people live and where apartments can easily cost equivalent of USD 750k, some much more.

The favelas surround every city in Brazil and there's a lot of drugs and street crime. But for those who are careful, it's not difficult to avoid attention. I spent a lot of time living in Rio during the 90s and never got robbed once. I now have a luxury property in the North East which would compare well against anything I could buy in Central London, in terms of construction quality and floor space.

The biggest problem in Brazil is government.

 

Sat, 12/19/2015 - 18:10 | 6943887 Escrava Isaura
Escrava Isaura's picture

 

 

Brazil has many issues/problems:

 

Brazil was a colony and never an empire.

Too much foreign capital looting its resources and labor.

Huge inequality.

Many internal issues, such as corruption and inefficiencies that will take time to solve.

 

Sat, 12/19/2015 - 18:57 | 6944100 smacker
smacker's picture

I agree with everything you say there Escrava.

Brasil also has a long history of believing that socialism is the solution and governments pursue socialist economics coupled to corporatism.

Sat, 12/19/2015 - 15:17 | 6943373 wulf
wulf's picture

Brazil's central bank keeps rising the interest rates, so where's the monetary expansion? I don't know, but I still think inflation will decrease in 2016, simply because people have no money.

Sat, 12/19/2015 - 16:10 | 6943486 smacker
smacker's picture

See: "“In essence” Goldman continues, the idea is that “growth and development will emanate from fiscal expansion, lower interest rates, currency devaluation, trade protection, national content rules and import substitution policies."

.Gov spending will be difficult to control.

As for inflation decreasing next year because people no money, dream on. That may be how things are supposed to work but, in my experience, not in Brazil with rising inflation. Note that they already have high rising unemployment, collapsing GDP but 15%+ inflation rising.

Sat, 12/19/2015 - 17:06 | 6943640 TheDanimal
TheDanimal's picture

Maybe Brazil will be the test case for helicopter money.  That'd be pretty populist.

Sat, 12/19/2015 - 19:19 | 6944168 R.R.Raskolnikov
R.R.Raskolnikov's picture

Thus time to prepare that popercorn.

Sat, 12/19/2015 - 14:49 | 6943325 wmbz
wmbz's picture

No need for any of these ass clowns to name what school they went to. It's all the same, print, print, print.

A poorly trained monkey could do the job, and would be far more fun to watch!

 

Sat, 12/19/2015 - 15:44 | 6943435 ThanksIwillHave...
ThanksIwillHaveAnother's picture

Olympics should be FUN!!!

Sat, 12/19/2015 - 15:48 | 6943437 Lucky Leprachaun
Lucky Leprachaun's picture

Chosenite ex-FM Levy 'invited to join the Government' by part-Chosenite Roussef. Chosenites thus held the two most important Government positions in a country where they comprise 0.05% of the population (95,000 out of 200 million). Go figure.

Sat, 12/19/2015 - 15:54 | 6943455 Sudden Debt
Sudden Debt's picture

How do you short a country like Brazil without having to trade in reals? 

Sat, 12/19/2015 - 16:02 | 6943468 smacker
smacker's picture

The plural is "Reais" :-)

Sat, 12/19/2015 - 16:51 | 6943587 R.R.Raskolnikov
R.R.Raskolnikov's picture

Short shares from banks in Brazil listed on the NYSE.

Sat, 12/19/2015 - 17:09 | 6943654 TheDanimal
TheDanimal's picture

Maybe look into buying bitcoin.  I know that was mentioned as a good way to short China but I bet it appreciates a little on capital outflows from other countries as well.  Personally I'm still on the fence about the cryptocurrencies so I doubt I'd hold any of them for very long.

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