Brazil. What Does Impeachment Mean For Investors?

It looks very much as though Brazil is about to impeach Dilma. In a country with a system of governance as deeply flawed as Brazil’s, it would be too much to expect that whoever comes next will simply flip a good governance switch. Yes, Brazil has had the occasional bout of good governance, as it did in the under Fernando Henrique Cardoso, but to old EM hands and Brasileiros this seems to have been the exception to the rule.

However, without getting into the weeds, there are two reasons why it would be wrong to assume things will automatically get worse. One, traumatic change tends to breed honeymoon periods. Hard to imagine there wouldn’t be a sense of relief—at least in the short term. Two, Brazil’s next leader is unlike to be the next FHC, but he or she will have degrees of freedom to jettison policies that didn’t work—including ones that even Dilma no longer liked but couldn’t afford politically to change. In short, a kitchen-sink-under-the-bus dynamic will provide political cover for a decent amount of low hanging policy fruit. And given the starting point of post five brutal years, the fruit tree is heavy, and deeply negative investor sentiment is ripe to be wrong footed.

This simple, behavioral take suggests to me that Dilma’s impeachment will mostly likely be a modest net positive—especially in the short term—with an option on a larger net positive if Brazil gets lucky with its next leader/governing coalition and/or investor sentiment in emerging markets starts to turn.

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