• President will seek unity, threatening unpopular budget laws
  • A government under vice-president also likely to struggle

Gains in Brazilian assets spurred by the move to impeach President Dilma Rousseff are unlikely to last as Latin America’s biggest economy struggles, Brazil’s Verde Asset Management said in a letter to clients.

Rousseff will seek to unite her allies during the impeachment process, so the government will have no scope to push through unpopular measures needed to improve fiscal accounts, the hedge fund said in a monthly report to clients. If Rousseff is impeached and Vice President Michel Temer takes over, an unelected government faced with corruption investigations, faltering growth and surging unemployment would also struggle to make changes such as delinking the minimum wage from inflation, the fund said. 

“One way or another, it seems like Brazil’s fiscal problems will get a lot worse before they can be solved,” the letter said. "Given Brazil’s fundamentals, there are no doubts that we are still in a very delicate situation, and that it will not improve easily.”

Sao Paulo-based Verde Asset had 39 billion reais ($10.4 billion) under management as of the end of November, according to information in its website. Verde has 20 percent of its main investments in dollar assets, mostly equities, while its the local investments denominated in reais are mostly in inflation-linked bonds due in between three and four years, it said in the monthly letter.

Brazilian lawmakers initiated impeachment proceedings against Rousseff last week. Moody’s Investors Service said on Wednesday that it may cut Brazil’s rating to junk, which would make it the second major company to do so. With the economy shrinking the most since 1990 and inflation more than double the central bank’s target, a turnaround in Brazil’s economic and fiscal performance "now appears unlikely in 2016,” the rating company said.

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