Brazil: The political genie is out of the bottle - TDS

Sacha Tihanyi, Senior Emerging Markets Strategist at TDS, believes that the latest political events in Brazil will significantly impact the Temer administration’s viability, a factor that must now be properly reflected in Brazilian asset prices.

Key Quotes

“If the accusations against Temer are found to have substance, we believe that the most likely outcomes are resignation, impeachment, or political deadlock until the 2018 election.”

“We take it as given that the pension reform is now off the table for the time being, and perhaps until a new government is directly elected in 2018.”

“This now increases the required fiscal risk premium in Brazilian assets, and until greater clarity on political/ fiscal outcomes is achieved, we revise our USDBRL forecasts to 3.50 and 3.40 for end of year 2017 and 2018 respectively.”

“We tentatively maintain our call for the BCB to ease 100bps at the May meeting, and 50bps in July and September before holding, and suggest the bias for an increased pace of easing is now nullified by political/fiscal risk.”