Brazil’s currency, real, rose as Dilma Rousseff was impeached. This paved the way for a fundamental shift in economic policy after the country sank into its deepest recession in a century. However it is still in the air if the country will experience any improvements in the economy for the next few years.
The currency defied a slump in emerging markets Wednesday, climbing 0.4 percent to 3.2267 per dollar Wednesday in Sao Paulo after Senators found Rousseff guilty of bypassing Congress to finance government spending, paving the way for her vice president, Michel Temer, to serve out her term until general elections in 2018.
Brazil’s financial markets have rallied this year on prospects that Mr. Temer, once he formally takes over, will win support for legislation to cap a near-record budget deficit and overhaul the pension system. After plunging 33 percent in 2015 as the country lost its investment-grade credit rating, the real is the world’s best performing currency in 2016 after high interest rates attracted investors hunting for better yields and if history can tell anything the new President will keep interest rates high.
“Coming from a very attractive starting point, the real has been outperforming as a result of the change of president and government, which are important factors behind the rally this year,” said Per Hammarlund, the chief emerging-market strategist at SEB SA in Stockholm and one the top forecasters for the Brazilian currency.
Latin America’s largest economy contracted more than analysts forecast in the second quarter. Brazil’s gross domestic product declined 0.6 percent in the three months ended in June, after a revised 0.4 percent drop in the previous quarter, the national statistics institute said Wednesday. The figure was worse than the median estimate for a 0.5 percent decline from 46 economists previously expected. From a year earlier, GDP shrank 3.8 percent after a 5.4 percent drop in the previous quarter.
But the general idea among the economists surveyed is Mr. Temer government has a better potential. They believe it’s not Brazil’s underlying fundamentals that are driving the real, it’s the conviction among investors the new President has a better team and, contrary to Ms. Rousseff, will let them do their job. “If you combine Brazil’s enticingly high yields with a change of government, you have a winning combination despite the plethora of risks going forward”, said Hammarlund.