One of the most important things to understand about the global EM rout is that while the laundry list of well-known issues (e.g. slumping commodity prices, slowing Chinese growth, the threat to export competitiveness from Beijing’s deval, and the possibility that the Fed will at some point raise rates) have unquestionably catalyzed the downturn, there are a number of country-specific, idiosyncratic political factors that have served to make things worse in Turkey, Malaysia, and perhaps most importantly, Brazil.
President Dilma Rousseff “enjoys” an approval rating that might as well be zero and the threat of her impeachment as well as the threat that finance minister Joaquim Levy may ultimately quit out of sheer frustration have created an enormous amount of uncertainty in an environment that was already extraordinarily volatile. The result: immense pressure on the BRL as the currency shoulders the burden of a dramatic “adjustment” in both the fiscal and current accounts.
Now, just when it looked like things were set to turn around thanks to Congress’s move to uphold most of Rousseff’s spending vetoes, paving the way for at least some semblance of a turnaround for the country’s budget deficit, things took a turn for the worst. Here’s Bloomberg [7]:
Brazil’s audit court recommended that Congress reject government accounting practices for the first time since 1937, in a decision that could be used as legal justification to impeach President Dilma Rousseff.
All members of the court, known as the TCU, voted Wednesday to reject the president’s 2014 accounts. The government used fiscal maneuvers last year that broke Brazil’s fiscal law in order to hide a budget deficit, Augusto Nardes, the auditor responsible for examining the accounts, said. Rousseff’s legal team denies the charges.
"This situation is even worse than simply a widespread and consistent violation of the fiscal-responsibility law," Nardes said. "This shows the executive branch’s lack of respect for the national Congress."
Congress will make a final decision on the accounts. There’s no time limit for lawmakers to review the court’s recommendation, which eventually will be brought to a vote. The TCU’s decision revives threats of impeachment, raising questions about Rousseff’s survival amid the deepest recession in more than two decades and a wave of corruption probes into some of her allies.
Lower house President Eduardo Cunha, a critic of Rousseff, said last week a rejection by the TCU could "supercharge" the creation of new impeachment requests.
"Congress has and will have the last word -- always," Cunha said Wednesday.
The real, the worst performing emerging market currency in 2015, fell as much as 0.55 percent Thursday morning on the TCU decision before gaining 0.9 percent to 3.8511 per U.S. dollar at 9:22 a.m. local time.
“The real will continue to be under pressure,” said Bernd Berg, a London-based emerging-markets strategist at Societe Generale SA. “I think it will be a continuous and arduous political struggle from here and some will try to bring the impeachment proposal forward.”
And here's the full breakdown of what's been a particularly bad week for the government (again, via Bloomberg):
- Yday, Congress again delayed voting on vetoes, Supreme Court and TCU court denied request to suspend TCU auditor responsible for ruling on legality of govt’s 2014 budget, and TCU unanimously recommended that Congress reject govt accounting practices
- “This is Dilma’s week of Waterloo,” said David Fleischer, a political science professor at the University of Brasilia
- TCU report will be sent to committee formed by Congress members and ultimately sent to either senate or lower house
- Senator Rose de Freitas, president of the committee, said there is a 40-day deadline to issue preliminary report on govt’s accounts
- Committee will likely vote on accounts this year, she said
- Govt counting on Senate President Renan Calheiros to help avoid Congress rejection of accounts, which would push impeachment possibility forward: Folha de S.Paulo
- Lower house President Eduardo Cunha said yday that ruling refers to Rousseff’s first term, and doesn’t necessarily taint second term
- Govt said decision is only a preliminary result and criticizes ruling
- Govt will appeal to Supreme Court against TCU decision: Estado
- Opposition already discussing accelerating impeachment hearings: Folha
- Decision by TSE court to investigate Rousseff’s campaign financing will push PMDB towards impeachment, according to party heads: Folha
- Waiting could threaten Vice President Michel Temer, who would also be removed from office in TSE probe
- PMDB is Rousseff’s largest allied party
- Impeachment risk rises “significantly": Estado de S.Paulo
The political turmoil outlined above triggered a quick reversal in the BRL's fortunes...
... and going forward, any strength is likely to be transient and due largely to technical factors:
- BRL +0.5% at 3.8666/USD, trimming yday’s losses despite a series of govt setbacks yday that increased political uncertainty; outperformance may be flow-related as mkt liquidity thin, Bloomberg strategist Davison Santana writes.
- BM&F 1st future market depth shows reduced size of orders amid very wide spread; lack of liquidity increases volatility
- BRL move counterintuitive, which suggests a flow-related move on spot, future or PTAX fixing, local trader says
- DI curve widens 2-18 bps on steepening move, better reflecting increased risk perception than FX mkt today
So watch closely because this trainwreck may be about to get immeasurably worse. Although the people clearly want Rousseff out, the market hates uncertainty and Rousseff's exit would most assuredly serve to weigh on traders' already frayed nerves, at least in the near-term...
