To be sure, emerging markets are for the most part an across-the-board trainwreck right now, as a confluence of factors including still-depressed Chinese demand, sluggish global growth and trade, depressed commodity prices, and a looming (supposedly) Fed hike have conspired to push emerging economies from LatAm to AsiaPac to the brink.
That’s no secret and neither is the fact that Brazil was long expected to be the epicenter of any future EM crisis just as it was, in many ways, the picture of EM success during better times.
Having said all of that, the extent to which everything that could go wrong for Brazil did go wrong for Brazil is truly something to behold. Indeed, even we’ve been surprised with the pace at which the situation has deteriorated and in the wake of the S&P downgrade the market is now left to ponder just how much worse things can get and also whether somehow, the embattled government can manage to get its fiscal house in order before the whole thing falls apart completely. On that note, we present the following assessment from Goldman which pretty much sums up the myriad obstacles that lie ahead:
We expect the economy to continue to face headwinds from:
- the ongoing fiscal and quasi-fiscal adjustment
- higher interest rates
- increasingly exigent credit conditions
- rapidly weakening labor market
- higher levels of inventory in key industrial sectors
- higher public tariffs and taxes
- high levels of household indebtedness
- weak external demand
- soft commodity prices
- political uncertainty
- extremely depressed consumer and business confidence.
Oh, is that all?
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On the bright side, the BRL’s harrowing decline and an outright lack of demand may ironically serve to limit the downside:
On the positive side, a more competitive exchange rate and weak domestic demand conditions should gradually lift the contribution of net exports to growth and provide a floor for the expected contraction of real GDP in 2015.
Meanwhile, the political turmoil surrounding calls for President Dilma Rousseff's impeachment and the ongoing "Carwash" investigations continue to cast a pall over attempts to right the ship. Here's the latest courtesy of Bloomberg:
- Session to discuss President Rousseff’s vetoes on measures that may increase govt spending is expected to take place tomorrow;
- Govt says initiatives approved by Congress earlier this year may represent ~BRL6b/yr in additional spending over the next 4 years, undermining fiscal austerity efforts
- Fresh defeat in Congress would also underscore Rousseff’s political fragility
- Breach of 3.91 last week opens way for BRL to test all- time low at 4.004 if BZ budget is hit by Congress decision
- Rousseff’s allies suggesting she may delay announcement of ministry reform, also expected this week, to avoid extra friction with other parties whose posts may be cut; gives Congress further chances to override vetoes
- Reform seen more as cosmetic by mkt participants, as no significant impact in expenses expected; Chief of Staff Aloizio Mercadante’s exit would be only signal with potential positive impact, local trader says
- Veja reports Lower House President Cunha will analyze the 13 impeachment requests filed so far at pace of 3 per week, beginning with the ones with weaker legal grounds
- Impeachment request submitted by PT party co-founder Helio Bicudo and former Justice Minister Miguel Reale, which is considered the strongest, expected to be analyzed at end of Oct. or beginning of Nov.
- PSDB leaders see need to let Rousseff “bleed” longer in her post, according to Veja; it may be more interesting for opposition and PMDB to attempt to force Rousseff to address most unpopular measures first before advancing with impeachment talks, local trader says
- Brazil police carry out 11 court orders in new Carwash phase
- Brazil’s Engevix Executive Arrested in New Carwash Phase: Estado
Finally, Brazil's former Treasury Secretary (who's now chief economist at Banco Safra) described recent actions by the central bank has reflective of "crisis mode." Via Bloomberg:
- Treasury announcing it will buy back 1m NTN-F at auction today is an attempt to ease pressures over DI rates, Carlos Kawall, chief economist at Banco Safra, says by phone.
- Move is similar to BCB auctions of FX credit lines and swaps for rollovers; such actions are done in “crisis mode,” not to fix structural problems, but to avoid idea that BZ mkt is out of control
- BZ also could reduce offerings of fixed rates bonds, former Treasury Sec. Kawall says
- BCB could even sell reserves when political scenario becomes less uncertain than it appears now
- BRL nearing record lows is dangerous for inflation; FX pass- through for prices, while still limited, may increase
- Recent pressures that led BRL to near 4.00/USD and Jan 21 DI to pass 16% attributed to uncertainties over risk of Rousseff being impeached and fears that Congress could increase public spending
Summing up...
