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Brazil’s uncertain future: On Antonio Palocci’s resignation

Finance minister’s resignation leaves investors feeling cautious.

Antonio Palocci’s resignation as Brazil’s finance minister last month marked the culmination of six months of intense pressure over his role in an alleged corruption scheme. He is the most prominent casualty yet of a scandal that has dogged President Lula’s administration for nearly a year.

Though not a surprise, Palocci’s departure is still a big blow for Brazil. He is the architect of the stable fiscal and macroeconomic policy that has seen Brazil move closer to attaining investment-grade status.

When he first came to the ministry three-and-a-half years ago, Brazil’s credibility was in question. In the run up to the 2002 presidential election, the sovereign’s risk premium had spiraled out to 2000bp over US treasuries and there were fears that Brazil would default on its debt repayments. Palocci’s first task was to stabilize the situation and convince investors that he would enact pro-market policies. In this he has been a success. Today, the country’s risk premium is nearer 200bp over than 2000; the domestic stock market is booming; and the real is one of the best performing currencies in the world.

Still, Brazil has some way to go before it starts matching the performance of other developing economies, especially those in Asia.

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