Brazil Real, Stocks Lead World Declines Amid Political Turmoil

  • Ibovespa drops to lowest since 2009, led by Itau and Bradesco
  • Brazilian currency extends this year's slide to 33 percent

Brazil’s real and stocks led global declines amid speculation that President Dilma Rousseff would name Planning Minister Nelson Barbosa to replace Joaquim Levy as finance minister. The decision was announced after the market closed.

Barbosa is inheriting a deepening economic crisis marred by political turmoil, falling commodity prices and investor skepticism. The change, said to be spurred by Levy’s frustration at the government’s inability to push through fiscal reforms, adds to political turmoil after the Supreme Court ruled Thursday on new impeachment procedures that may improve Rousseff’s odds of hanging onto her job. Meanwhile, data showed economic activity declined more than forecast in October, while inflation accelerated to more than twice the the central bank’s target.

"Levy was a strong and very market-friendly name, but he simply could not survive in the position," said Reginaldo Galhardo, a foreign-exchange manager at Treviso Corretora de Cambio in Sao Paulo. "Barbosa is seen as much closer to Rousseff, and is not nearly as respected. We should see some pressure on the real and Brazilian assets in the next few days." 

Traders have pushed down the value of Brazilian assets this year as the government struggles to curtail a widening budget deficit and revive an anemic economy amid a corruption probe and calls for Rousseff’s impeachment. On Wednesday, Fitch Ratings handed Brazil its second junk rating, which could force institutional investors whose bylaws prevent them from holding such securities to dump them.

The real tumbled 2.6 percent to an 11-week low of 3.9831 per dollar in Sao Paulo, leaving it down 2.8 percent in the past five days. The currency has weakened 33 percent this year against the dollar, the most among 16 major currencies tracked by Bloomberg. The benchmark Ibovespa stock gauge fell 3 percent to 43,910.60, the lowest since April 2009. Lenders Itau Unibanco Holding SA and and Banco Bradesco SA contributed the most to the drop after being downgraded by Fitch Ratings.

The iShares MSCI Brazil Capped exchange-traded, the nation’s biggest ETF, declined 4.6 percent to $21.22 at 3:56 p.m. in New York.

Investors are now asking themselves whether Barbosa can steer Brazil out of deep recession when Levy, an experienced, University of Chicago-trained economist, could not. With Rousseff’s disapproval rating at a record high and Congress rattled by scandals and impeachment proceedings, the challenge is as political as it is economic.

"There is no good news," Reginaldo Siaca, a currency manager at TOV Corretora de Cambio, said from Sao Paulo. "There is a great selection of facts souring Brazilian assets: economy shrinking, inflation accelerating, Levy leaving, impeachment losing traction."

Swap rates on the contract maturing in January 2017, a gauge of expectations for changes in Brazil’s interest rates, fell 0.02 percentage point to 15.83 percent.

“It’s hard for us to know what’s going to happen -- all these obstacles are making for a tumultuous market,” Ari Santos, a trader at brokerage H.Commcor, said from Sao Paulo. “Besides the politics, we also have expectations that we’re going into 2016 with GDP getting worse -- the economy is stuck.”

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