Brazil’s pain has no end in sight as impeachment proceedings against President Dilma Rousseff kick off

The soap opera of Brazilian politics continues as impeachment proceedings against President Dilma Rousseff kicked off last week.

 

After months of lobbying, petitions to have the President impeached were accepted by the speaker of the lower house, Eduardo Cunha, one of the most powerful sitting politicians.

 

The charges (which she denies) are that Rousseff manipulated public accounts in the run-up to her re-election last year, in breach of Brazil’s fiscal rules. It’s not just politicians that Rousseff can count as her enemies – she has inspired mass protests throughout the year, and approval ratings say she is the most unpopular leader for 25 years. 

 

Impeachment is unlikely to come about, given the hurdles for removing a President are high. But the process is already tainted by corruption. “We are highly sceptical that the impeachment will be successful because the very backdrop of the petition is distorted by corruption,” says Daniel Tenengauzer of RBC Capital Markets.

 

In another twist to the tale, Cunha is  under investigation for allegedly hiding $16m in Swiss bank accounts, money police believe is ill-gotten gains from the Petrobras scandal. Cunha has held off from accepting the impeachment petition for some time, and his decision to go ahead may be less to do with Rousseff and more with himself. 

 

“The question is whether he is doing this for the right reasons, or to shift attention away from himself,” says Will Ballard of Aviva Investors.

 

But regardless, Rousseff will be wrung out and hung up to dry over the next few months ­– a situation that does not bode well for Brazil. 

 

It couldn’t have come at a worse time for the nation. Blessed with abundant resources and once the most promising of South American economies, Brazil should be steaming ahead. But years of fiscal mis-management have taken their toll. Brazil is suffering the worst recession since the Great Depression, while inflation runs close to 10 per cent and unemployment is high. 

 

There have been capoeira-style swings in markets while the Brazilian real has sunk like a brick, down 40 per cent this year. “Ratings agencies are considering another downgrade. That just throws even more muck in the air,” Ballard says. 

 

Global investors have shied off Brazil as its politics have been a mess. Rousseff has been unable to push through reforms the country so desperately needs. “Brazil is the only problem child in emerging markets that is not showing any signs of improvement,” says Wes Sparks of Schroders. The global environment of low commodity prices, a slowing China and upcoming US rate hikes are also unhelpful for the commodity-reliant economy.

 

Ordinary Brazilians have spent the year appalled at corruption in the corridors of power, as dozens of politicians have been arrested in connection with the estimated $3bn stolen from state-owned oil company Petrobras. 

 

The money went to bribes paid to business leaders and politicians. Even by South American standards the scale of the crime is vast. Police raids have uncovered so much fine art given as “gifts” to officials that they have opened an exhibition. One chief pledged to give back everything he was paid in bribes – all $100m of it.

 

When the impeachment was announced Brazil’s Ibovespa bounced, rising over 3 per cent in one day. “I know there are people who have been buying up Brazilian equities now, because they think expectations are super-low and this is the first sign that changes are coming. But it is very, very risky and it is too early too call,” says Maarten-Jan Bakkum of NN Investment Partners. 

 

But given the dire outlook for Brazil, any joy in the market is likely to be short lived. Another explanation for the rise is that traders were covering short positions. “I think that’s leading people astray. People are looking at this and thinking it will clear the air. I really don’t think so,” Ballard says. 

 

Crucially, as share prices have fallen so have company earnings. This leaves the price-earnings ratio of the market broadly the same as the start of the year. “It does not feel we are at that level… the point where one would want to be invested,” Ballard adds.