What happens to the Brazilian Real after Rousseff’s Impeachment?
Those watching the chaotic political reversals in Brazil may be forgiven for considering the nation’s dramas as a South American-styled Coronation Street. News comes like a never ending carnival featuring allegations of corruption and bribery at the highest offices of governance, the dreadful Zika virus, the President insisting she’ll fight impeachment proceedings and this is only a warm-up leading up to the summer Olympic Games. Brazil, a nation fond of hyperbole and exaggeration has already outdone itself in arresting the world’s attention. As a Brazilian would put it when describing something that’s become outrageous: pra caruamba!
Calamity and the Currency
As unpredictable as political events in Brazil have become, analysts are certain that Dilma Rouseff, despite her best efforts, will not be in office by August, when the Olympics begin. Her downfall will trigger the rise of Brazil’s currency. The real, the world’s second best performing major emerging market currency (after the Russian rouble) has been pinned like the tail of a kite to the President’s turbulent political battles, except that it rises as she falls. The low rate of the real might be expected, given the fact that the country is in its worst recession for a century, yet the currency seems as sturdy as its embattled leader, having pressed ahead to 11% gains against the green-back since January, when news of Rouseff’s impending ousting started. Markets were unprepared for the real’s dramatic drop in value of nearly 5% against the USD as news of the proceedings being reversed broke. By the time her impeachment process was back on again, the real had rebalanced back up from R$3.67 to the USD. It was remarkable to see how much a major currency could be impacted by a single political event.
The Market favours Government Reform
The real had strengthened significantly as the Brazilian Senate appeared poised to try the president on charges of manipulating government financial accounts but saw a marked reversal when proceedings were suspended by the new acting speaker. Waldmir Maranhao, clearly hadn't understood what he was getting into (to coin the Brazilian idiom-he was travelling through mayonnaise) and had only just replaced the country’s most powerful politician, Eduardo Cunha. Maranhao would reverse his position quietly within 24 hours and the real remained steady as the market again anticipated government reforms.
Investors and Brazilians alike are fed up with the massive scandals that will continue to hang over the government, even as Michel Temer, the vice President takes over as the nation’s leader, as his party is also implicated in the corruption scheme. It appears nearly every party and politician can be proved to have some association with Petrobas and the bribery scandal. Economic reform is long overdue for the 8th largest global economy and as the real gains strength other countries will benefit from a more competitive playing field. Brazilian exports have benefited from the country’s lower valued currency.
The Largest South American Economy
Brazil’s rising real will have an impact on farmers worldwide, as a stronger currency will slow the country’s massive food exports that have been keeping prices low as global surpluses have stockpiled. Brazil accounts for 40 percent of the world’s exports and is the world’s top exporter of sugar, coffee, beef, chicken and soy beans. Brazilian producers had been increasing shipments, profiting from the weak real against commodities sold in dollars on global markets. The price of coffee, sugar and soy beans had all dropped, so it’s anticipated that the real’s appreciation will have a positive effect on commodity prices. Brazil is such a major exporter of sugar; analysts expect the real’s rise will be tied to the global price of sugar in the coming year.
Rio Readies for the Olympics
Although every country hosting the Olympics has scrambled in advance of the games, Brazil’s preparations have tackled an unprecedented range of issues the country hasn't yet expunged. The polluted water that may sicken athletes, for instance, has been an issue locals had been promised would be resolved for years to no effect. The mosquito-borne virus, Zika, will be impossible to eradicate and will certainly be a risk for the projected 400,000 visitors. Round-the-clock construction continues on a new underground system and several main buildings which will be given greater scrutiny after the tragic collapse of a newly built bicycle path collapsed. In April, just as the Olympic flame was being lit in Greece, a 150 foot-long section of an elevated path was flung into the air by a wave, killing two people. The year’s largest sporting event is projected to cost Brazil 39.1 Billion Reals or about $9.8 Billion at a time when Rio de Janeiro’s state government is so strapped for cash they were unable to pay public workers including police and fire-fighters, teachers and doctors. Given the sad state of affairs, locals employ the phrase: é para inglês ver -which describes putting a pleasant façade over an ugly truth. “For the English to see” refers to the 1831 treaty Brazil signed with Britain that promised to end slavery, although it continued for over 50 years. Now the phrase refers to efforts the city makes to present itself positively to foreigners.
These issues aren't new to Rio, nor are the challenges of hosting large events. The 2014 World Cup came off well in spite of the fears preceding the matches, although the country didn't find a good return on the $11 Billion it spent, which did little to boast the economy. The low currency has spurred Rio’s hotels to be nearly fully booked with just 14% of the rooms remaining. With 40,000 rooms and 400,000 projected visitors, the prices have tripled from £67 a night to £196. If the problems leading up to the games are having any effect, it may be seen in the slow ticket sales. In early April organizers reported that they’d only sold half of the tickets for the games and the government pledged to purchase unsold tickets to distribute to local schools should sales remain low (presumably after they've paid employees). Rio’s economy, reliant on oil exports, won’t pull it out of its worst recession since 1901 by hosting the games but, despite the country’s myriad challenges, Brazilians do, indeed have a particular knack for throwing a wild party. Whatever happens in the near future, Brazil won’t be accused of being boring.