A Less Terrible Political Moment for Brazil

Brazil’s government scored an important set of political victories yesterday, many of which impact the fiscal accounts.  It’s too soon to say that the tide has decidedly changed, but there are some positive signs, and asset prices are responding accordingly.

By a close margin, the government managed to maintain two important vetoes.  With a margin of only six votes, the veto stopped an increase of nearly 60% in the salaries of judiciary workers.  The second veto relates to a tax break relating to teachers.  Other vetoes against what has been termed a “fiscal bomb” should also be upheld, further removing this risk factor from the political outlook.

The government also approved changes to the 2015 budget bill, which now sees a -BRL120 bln primary deficit, or -2.1% of GDP.  It was passed by the budget committee, but also it also has to be passed by congress. This basically just admits the failure to reach the original target, but its approval still counts as another political victory and a necessary step towards greater fiscal transparency. Separately, President Dilma reinforced the view that Finance Minister Levy will stay, at least for now.  For us, the emphasis is in the last part.  It’s hard to imagine that he will still be there by the end of 2016.  The trial balloon of former central bank president Meirelles was sent out and was well received by the markets.

And lastly, the impeachment story seems to be losing strength, at least for now. This is in part due to the complicated position of the president of the Lower House, Eduardo Cunha, who is blocking the motion for his own political defense. At this point, it seems unlikely that the opposition has enough support to move ahead on its own.

One interpretation of these recent events is that the cabinet reshuffle undertaken in October is bearing fruit.  President Dilma granted several favourable positions to its allied base, which surely helped, even if it may have not bought as much support as she may have expected.  But perhaps the key move was placing Ricardo Berzoini as political coordinator and Jaques Wagner as the new chief of staff, which seems to have improved governability.

The real is outperforming on the day at BRL 3.7750 against the dollar, but is not yet breaking any new ground.  Relatively speaking, however, BRL is the top performing EM currency this week, up 2.6% since last Friday, and is one of only two (along with TRY) that is up against the dollar.  Similarly, the Bovespa has outperformed most EM indices over the last few sessions.