On Tuesday, embattled Brazilian President Dilma Rousseff was dealt a bitter blow when PMDB - the party of VP Michel Temer and House Speaker Eduardo Cunha - officially left the coalition government.
"Dialogue, I regret to say, has been exhausted," Tourism Minister Henrique Eduardo Alves, a PMDB leader and former speaker of the lower house of Congress, said on Monday as he resigned from Rousseff's cabinet.
To let the market tell it, a complete political meltdown is great news. As we showed yesterday and as we’ve discussed on a number of occasions this month, the more precarious things get politically in Brazil, the harder the BRL and Brazilian risk assets rally. Why? Because the assumption is that when it comes to the country’s floundering economy, anything is preferable to the current arrangement. With output in free fall, inflation running in the double digits, and unemployment marking an inexorable rise, it’s difficult to imagine how things could possible get any worse.
Indeed, the prospect that Rousseff and Lula will be sent packing has created so much upward pressure on the BRL that the central bank has begun selling reverse swaps to keep a lid on the currency lest its rapid appreciation should end up short circuiting a much needed economic adjustment.
Meanwhile, Brazilian stocks have soared this year amid the turmoil. Of course this state of affairs simply isn’t sustainable. As Craig Botham, an emerging markets economist at Schroder Investment Management put it, "you don’t invest in a place where you don’t know who’s in charge."
Right. And you also don’t invest in a place where the economic fundamentals get worse by the day.
Just this morning, for instance, we got the latest read on the fiscal deficit and it was, for lack of a better word, a disaster. The budget gap was the largest on record and came in wildly above expectations. Long story short, the primary deficit printed at 2.1% in February, up from 1.75% the previous month. “While revenues are falling sharply due to the economic situation, at a rate of 12 to 13 percent (a year), expenses continue to grow,” Tulio Maciel, head of the central bank’s economic research department told reporters on Wednesday.
Meanwhile, debt-to-GDP continues to rise. Here’s Goldman with the full breakdown of today’s dismal data:
The overall public sector fiscal deficit (primary surplus minus interest payments) remained broadly stable at a very large 10.8% of GDP in February, substantially above the 6.6% deficit recorded a year ago. The 12-month net interest bill dropped to 8.6% of GDP in February compared to 9.1% of GDP in January. The consolidated public sector primary fiscal deficit climbed to 2.1% of GDP from 1.75% of GDP the month before.
Gross general government debt worsened to 67.6% of GDP in February, up from 67.4% of GDP in February and 57.2% of GDP at end-2014.
A deep, permanent, structural fiscal adjustment remains front-and-center on the policy agenda to restore both domestic and external balance. In our assessment, at the end of the fiscal consolidation process Brazil needs to end up with a primary surplus of 3.0% to 3.5% of GDP. This would be the level of primary surplus that would put gross public debt on a clear declining trajectory, something that is required forBrazil to rebuild fiscal buffers and regain room to use fiscal policy counter-cyclically, whenever needed and appropriate.
Ultimately, a weaker BRL and a deep structural fiscal adjustment are key pillars to restore domestic (i.e., lower inflation) and external balance (i.e., to promote and consolidate the adjustment of the current account). However, given the very modest scope and slow pace of fiscal consolidation, and its far-from-ideal quality, the burden of current account adjustment will likely continue to fall disproportionately on monetary policy and the BRL.
Now obviously, there's a long, long way to go for Brazil to get back to primary surplus at all, let alone push the black ink up to 3% of GDP. The idea that this is going to turn around the second Rousseff leaves the Presidential palace is laughable at best. And speaking of laughable, have a look at this rather amusing bit from Citi:
- Rousseff impeachment won’t sustain Brazil rally
- As the likelihood of President Dilma Rousseff’s impeachment increases “investors will take a step back.
- “It might be the case of buying the rumor and selling the fact.”
In other words: investors might suddenly wake up to the fact that an intractable political crisis is most assuredly not risk positive.
Meanwhile, Rousseff is back on the tape likening the impeachment proceedings to a coup. "Presidents must be chosen in free elections," she proclaimed on Wednesday. Countdown to impeachment: around 45 days.
Finally, it's worth noting that according to the latest figures, NBC has sold $1 billion in national ads for the Summer Olympics in Rio. "We've surpassed the $1 billion mark four months ahead of (the 2012 Summer Games in) London," Seth Winter, NBC Sports' executive vice president of advertising sales, said in a statement.
$1 billion. That's a lot of refunds, Seth.