December 3, 2015 10:01 am
Brazil’s stock market and currency strengthened on Thursday on news that the congress was initiating impeachment proceedings against President Dilma Rousseff on charges she has been using accounting tricks to disguise the true state of public finances.
The Ibovespa benchmark stock index rose 3.75 per cent while Brazil’s currency, the real, strengthened 1.42 per cent against the dollar to R$3.78 after Eduardo Cunha, the speaker of the lower house of congress, announced late on Wednesday he would accept a petition seeking the president’s removal from office.
“The market is euphoric about this possibility of Dilma Rousseff being impeached,” said André Guilherme Pereira Perfeito, chief economist at Gradual Investimentos in São Paulo. He said some of the rise in the index was due to the closing of short selling positions by some investors who had bet on further bad news from Brazil. “The first reaction from the market has been positive but there are a lot of questions that need to be addressed in the coming days.”
The move by Mr Cunha, a powerful evangelical lawmaker who is himself facing calls for his removal from congress amid swirling corruption allegations, has heightened the already elevated political risk facing Latin America’s largest economy. His impeachment motion comes at a time when Brazil is facing its worstrecession since the Great Depression of the 1930s and Ms Rousseff`s left-leaning Workers’ Party, or PT, government is struggling to rein in a budget deficit.
Although her University of Chicago-trained finance minister, Joaquim Levy, is popular with markets, he has faced resistance from congress and elements within the PT to his efforts to rebalance public finances.
“As the dust settles, the biggest consequence of thepolitical wrangling that will inevitably follow over the coming months is likely to be further slippage on the fiscal front,” said Neil Shearing, economist with Capital Economics, in a note.
Elected last October with one of the narrowest margins in Brazil’s recent democratic history, Ms Rousseff and the PT have faced a barrage of bad news over the past year that has boosted public support for her impeachment.
The economy has soured dramatically, with gross domestic product contracting 4.5 per cent year on year in the third quarter.
On the political front, a corruption investigation into the company she chaired before becoming president, state-owned oil group Petrobras, has implicated scores of politicians from her ruling coalition.
The market is euphoric about this possibility of Dilma Rousseff being impeached
- André Guilherme Pereira Perfeito at Gradual Investimentos
The indications are that if 2015 is a bad year, 2016 will be little better. Barclays forecasts a 3.8 per cent contraction in the economy this year and a 2.8 per cent contraction next.
“The economic depression will not improve very much in 2016,” said David Fleischer, political scientist at the University of Brasília. “This means that there might be considerable . . . street demonstrations in 2016.”
Given this negative outlook, the timing of Mr Cunha’s attempt to impeach Ms Rousseff now rather than later might actually be a relief to the president, analysts say. Not only does this allow her to fight the impeachment question before the economy gets even worse but it comes as Mr Cunha himself is looking fatally weakened by his alleged involvement in the Petrobras investigation, analysts say.
Mr Cunha is accused of lying about the existence of secret accounts containing millions of dollars that he kept in Switzerland. He denies the accusations, which arose from the Petrobras probe, in which mostly ruling coalition politicians are alleged to have collaborated with former oil company executives to extract bribes from contractors.
Indeed, analysts say Mr Cunha’s decision to launch the impeachment process now was in retaliation for the PT’s backing of moves by the ethics committee in congress to consider stripping him of his seat over the Petrobras scandal.
“Cunha is [politically] toxic so he’s tainting the whole process and that helps the PT and her with casting this [the impeachment process] as a coup,” said João Augusto de Castro Neves, of Eurasia Group.
A confident Ms Rousseff, flanked by her senior ministers on Wednesday night, delivered a short statement in the presidential palace that sought to stress she is more honest than Mr Cunha.
“There are no suspicions hanging over me of stealing public money. I don’t have any accounts abroad,” she said. “The reasons behind this petition are inconsistent and without foundation.”
Part of Ms Rousseff’s confidence might also stem from the obstacles facing any impeachment process. The process will start with the selection of an all-party committee that will meet 10 times to hear the president’s defence and another five to formulate an opinion.
The lower house of congress will then vote on whether to recommend to the senate to start the formal trial of the president. This will require a two-thirds majority of the 513-seat lower house, difficult given that the government and its coalition partners have more than 300 seats. While many ruling coalition lawmakers are not loyal to Ms Rousseff, the government needs to muster only 172 votes, or one-third of the house plus one, to scupper the process.
If the process did move to the senate or upper house, Ms Rousseff would step down for 180 days after which the matter would be put to a vote requiring a two-thirds majority to pass. If she was ousted, Michel Temer, her vice-president from the PT’s main coalition party, the PMDB, would most likely get the top job.
He is seen as market friendly, a fact that Nomura economist João Pedro Ribeiro noted might encourage markets to initially rally slightly on the impeachment news.
But any ramp-up would be shortlived. “Not only is an actual impeachment far from a given, but it could be a very bumpy ride over the next few months as the process develops,” Mr Ribeiro said in a note.
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