The decision to approve a 2016 budget guidelines bill that targets a 0.5% primary surplus as opposed to a 0.7% surplus may have been the last straw for (former) Brazilian FinMin Joaquim Levy.
Speculation had been swirling for months that Levy’s exit was imminent as Brazil’s intractable political crisis made pushing unpopular austerity measures through Congress all but impossible for the University of Chicago-trained economist.
“In many ways, Levy’s task was daunting from the moment he took office,” Bloomberg notes. “Not only was the country already sliding into recession -- the result of plunging prices for Brazil’s commodity exports and four years of Rousseff’s interventionist policies -- but a corruption scandal emanating from the state-run oil giant was spreading fast.” Here's a look at the recession in historical context:
Well, the nightmare came to an end for Levy on Friday when the finance ministry announced that he would step down and Rousseff announced the confirmation of Planning Minister Nelson Barbosa as the new FinMin.
(Levy and Barbosa)
Barbosa, who holds a PhD degree in Economics from the New School for Social Research in New York and a Master’s degree and BA in Economics from the Federal University of Rio de Janeiro is, to quote Goldman, “an experienced public servant [and] is widely believed to have been one of the intellectual forces behind the so-called “New Economic Matrix” developed and implemented at the Ministry of Finance under former Finance Minister Mantega.”
“In essence” Goldman continues, the idea is that “growth and development will emanate from fiscal expansion, lower interest rates, currency devaluation, trade protection, national content rules and import substitution policies.” Right. So not exactly what the market might have wanted to see in a country that desperately needs to double down on fiscal rectitude.
"Levy leaving is a clear negative," Phillip Blackwood, managing partner at EM Quest Capital LLP told Bloomberg on Friday as the BRL real extended losses and stocks closed at six-year lows. Here's some historical context on the fiscal situation:
Barbosa sought to calm market jitters, telling reporters that he is committed to fiscal adjustment and the countries fiscal goals will not change with Levy’s exit. Obviously that's a bit difficult to believe because if the fiscal goals Levy advocated had been compatible with the direction the government intends to move in going forward, he wouldn't have been forced out in the first place.
For their part, Moody's (which is the last of the big three ratings agencies to maintain an IG rating for Brazil) says Levy's ouster "complicates fiscal consolidation." As a reminder, from Credit Suisse:
Meanwhile, Eurasia says the President's choice of Barbosa “certainly reinforces [an] increasingly bearish outlook should Rousseff in fact win the impeachment battle."
The new FinMin "now faces the daunting challenge of convincing investors and rating companies that he has the political support and personal conviction needed to shore up fiscal accounts," Bloomberg adds. "While Rousseff says she backs measures to raise taxes and cut spending, her allies are reluctant to tighten the belt amid surging unemployment and shrinking wages." Here's some further color from BofAML:
Naturally, the focus turns now to the direction of the fiscal policy under the new FinMin, which should affect the recovery in confidence and thus growth. With mounting downside risks to growth that heavily weigh on the government’s revenues and the ongoing challenges in passing fiscal measures in Congress, tangible results over statements will now be needed to improve expectations over primary fiscal results ahead.
Monetary policy may feel additional pressures to control inflation expectations under a less intense fiscal contraction, and our perception is that the risk for a hike in January continues to increase.
The continuing depreciation of the BRL should play against inflation expectations also, further increasing BCB’s pressures to deliver hikes ahead.
So in other words, Barbosa's appointment will put more pressure on the BRL which will in turn force Copom to get more aggressive with procyclical measures to control inflation which is precisely the opposite of the “New Economic Matrix” tenets as outlined by Goldman above.
In short, this isn't good from the market's perspective and you can bet the BRL and the Bovespa will likely trade lower up to and until Rousseff and Barbosa can establish some degree of credibility when it comes to managing a rapidly deteriorating fiscal situation. On that note we close with one last quote from Goldman:
Our, and the market’s, main concern is that the complex political picture, the beginning of impeachment proceedings against President Rousseff, and growing pressure from some political parties and social movements close to the government for a new policy direction may lead the administration to, at best, soften its commitment to fiscal austerity, and at worst, succumb to the temptation of fiscal populism.
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Bonus: selected charts from Credit Suisse: