Rousseff Impeachment Would Be Signal to Sell, Says Loomis Sayles

Brazil in Political Stalemate Over President Rousseff
  • S&P forecasts three years of budget deficits before interest
  • Brazil slowdown will hit middle class, Vieira da Cunha says

While the potential impeachment of Brazilian President Dilma Rousseff is seen as positive by some investors, Loomis Sayles & Co.’s Edgardo Sternberg says it would probably lead to more political confusion and a deeper fiscal impasse.

“The market thinks impeachment would be a good thing,” Sternberg said at a conference Thursday at Bloomberg headquarters in New York. “We take an opposite view. If there is one and the market rallies, from our perspective, it’s a good point to reduce positions in Brazil.”

A group of high-profile lawyers filed a request on Wednesday to impeach Rousseff, bringing closer a decision on her political survival after months of uncertainty that have paralyzed Congress, rattled financial markets and deepened an economic slump.

The stalemate among lawmakers, deepened by a corruption investigation involving the state-controlled oil company, has crippled the government’s ability to execute budgetary changes that were crucial in preventing the loss of the Brazil’s investment grade rating, Standard & Poor’s managing director Lisa Schineller said at the same event. S&P cut the nation’s rating to junk Sept. 9, and Schineller said she expects the country to post deficits for the next three years, even excluding interest payments.

“There’s a degree of unpredictability of how individual actors will act and how things will play out,” Schineller said. “All of this continues to weigh significantly on the economy, and its hard to see the economy turning until there’s more political stability.”

Joblessness has jumped to a five-year high this year while accelerating inflation slices into purchasing power, fueling a loss in confidence among consumers who had been the Brazil’s engine of growth. Latin America’s largest economy is now on track for back-to-back years of recession, and the central bank is refraining from loosening monetary policy to stimulate demand.

The slowdown “is something that will strain social relations in Brazil because the drop in real income we’re going to be facing is unprecedented in this century,” Paulo Vieira da Cunha, a former central bank director who is now chief economist at Ice Canyon LLC, said at the Bloomberg event. “You’re going to wipe out a significant part of the gains of the new middle class and that’s going to be quite hurtful.”

Vieira da Cunha says it’s unlikely Rousseff will leave office before the end of her term as long as she has the support of former President Luiz Inacio Lula da Silva.

Investors should now focus on Brazil’s municipal elections next year, said Vieira da Cunha. While unlikely, should Rousseff’s Workers’ Party come in with a low portion of the votes, around 25 percent, the nation’s political dynamics could change, forcing lawmakers to become more decisive, he said.

Otherwise, the likelihood that Brazil faces a “political crisis that lasts until 2018 is there, and this would be very, very damaging for the economy,” he said.

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