Brazil Traders Unnerved by Prospect of Impeachment and Aftermath

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As talk of impeaching President Dilma Rousseff has ratcheted up this month, investors have made one thing clear: they’d rather see her stay in office.

The nation’s benchmark Ibovespa stock index has tumbled 8.4 percent in August on concern her ouster would only exacerbate what analysts now forecast will be Brazil’s longest recession since 1931.

“The actual process of how Dilma could be replaced -- if she were to be impeached or resigned -- would be politically messy and divisive for the country,” Geoffrey Dennis, the head of global emerging-market strategy at UBS Securities, said by phone from Boston. “Even if you have a straightforward transition, there is no guarantee it would make things better.”

Rousseff, 67, said in an interview last week with SBT TV that she has never considered stepping down and that disagreements can’t lead to the ouster of an elected president.

A year ago, any sign Rousseff’s re-election bid may fail triggered euphoria in the stock market. But with the economic malaise deepening and an unprecedented bribery scandal rocking the nation since her inauguration eight months ago, investors are signaling Brazil can hardly afford the political crisis an impeachment would surely unleash.

Brazilian stocks approached a bear market on Wednesday, falling almost 20 percent from their peak in May. The index was down 0.2 percent as of 2:07 p.m. in Sao Paulo. Meanwhile, the nation’s currency has lost 24 percent this year, the worst performing major tender in the world. In the bond market, yields on its benchmark notes soared to a record this month.

The presidential palace’s press office didn’t reply to an e-mail request for comment on the impacts of the political crisis on Brazilian markets.

Street Protests

Calls for Rousseff’s impeachment have gained momentum in recent weeks, with more than half a million people taking to the streets on Aug. 16 to denounce corruption and economic mismanagement in her government. An Aug. 4-5 Datafolha poll showed her popularity among Brazilians sank to an unprecedented 8 percent, with more than two-thirds saying they support impeachment.

For the first time, analysts now forecast Latin America’s largest economy will shrink this year and next. Inflation accelerated to 9.6 percent in July, more than twice Brazil’s target, even as the central bank has boosted interest rates to the highest level since 2006.

“Things have deteriorated at a pace that has exceeded even the most bearish expectations,” Dan Raghoonundon, a Denver-based money manager at Janus Capital Management LLC, said by phone. “Markets now think, ’oh no, that’s another problem’ when they look at the political situation -- in addition to the domestic and external negative backdrop.”

Market Boost

The global plunge in commodities is also taking a toll on Brazil, which is the world biggest exporter of coffee and soybeans.

Still, Felipe Miranda, an analyst at equity-advisory firm Empiricus Research, said Rousseff’s removal from office may give the stock market the best chance to recover in the long term.

“If there’s a coalition to take charge of things after this administration is out, equities would go up,” he said by telephone from Sao Paulo.

At least two-thirds of the lower house is needed to initiate impeachment hearings. Rousseff would then have to temporarily step down until the Senate or Supreme Court makes a final ruling on impeachment.

In the past two weeks, Rousseff has attempted to build a coalition that may allow her to hang onto power. Business associations, bankers, and some of the country’s largest media outlets have joined workers and farmers traditionally aligned with the Workers’ Party in speaking out against impeachment.

“Investors wouldn’t like the uncertainty” if Rousseff is ousted, UBS’s Dennis said. “It’s very hard to argue this would be positive for the markets.”