May saw the first anniversary of Michel Temer’s presidency (he became acting president on May 12, 2016 – he did not become ‘full’ president officially until August 31, when former president Dilma Rousseff’s impeachment was finalized). It was also the month Brazil saw yet another political corruption scandal, which could yet mean that Temer does not get to mark a second year in the Planalto.
As the dust settles from revelations that could bring down the second president since the last presidential election in 2014, the reaction from international investors has been muted. True, there was a 10% fall in the São Paulo stock exchange the day after newspaper O Globo broke the story.
The exchange’s circuit breaker was triggered. It was dramatic stuff. And the currency did fall. But they both bounced back and, even if they have not returned to the pre-Temer scandal levels, they are still pretty healthy.
In trading early the following week, the real was moving between R$3.25 and R$3.30 to the dollar – weaker than around R$3.10 the previous week but not seemingly headed to R$4-plus that was seen when the fate of Rousseff was similarly hanging in the balance. The Ibovespa was around the 62,000 level – a bit down from the 68,000 area the week before, but still a long way north of the 38,000 mark it flirted with during the previous president’s political storm.
Many economists think the latest bout of uncertainty will knock the economy back into recession. So what is holding up investor confidence, the stock exchange and the currency?
Plainly, investors do not see a huge reversal in the economic progress that has been achieved in the last year. Arguably the majority of the credit for that goes to the new central bank governor, Ilan Goldfajn. The credibility of the central bank’s monetary policy has guided inflation expectations down below the 4.5% target, which has enabled a clear and direct course downwards for interest rates.
The bank acted decisively to support the real in the days after the Temer revelations; the limited falls mean inflation should not spike; policy moderation can continue. The pain of the re-conversion to an inflation-targeting approach has been absorbed (look at those unemployment numbers) and investors do not see the bank giving those gains back easily.
Whoever is president until the next general election in 2018 is unlikely to want or be able to re-ignite Rousseff’s fiscal fire that so badly damaged public finances. Frankly, the surprise isn’t that the real and the Bovespa have stayed so high after the latest chapter in the never-ending corruption enquiry, it is that they were so high in the first place.