The political crisis shows little sign of abating and Finance Minister Antonio Palocci is under renewed attack. DrKW carried out a survey among its client base to gauge the market reaction in the event of Palocci's departure. The overwhelming majority remained positive.
The Finance Minister is under the spotlight again and was the focus of several articles in today's local papers - under renewed attack from both the opposition and members of his own government. Not surprisingly, according to the local papers, he threatened to tender his resignation yesterday. In the meantime, however, and to avoid further criticism, Palocci has agreed to speak before Congress in order to defend himself against the most recent accusations. Palocci's speech is scheduled to take place on November 22nd. Until then, however, further accusations are likely to surface.
In DrKW's view Palocci is unlikely to resign in the near-term. However, rather than try to forecast the impossible (the final outcome of this political crisis) or speculate over the future of individuals and possibly get it badly wrong, it carried out a survey among its client base in order to find out how the markets would react in the event of Palocci's departure.
The following questions were put to clients:
(1) Would departure change your views on Brazil?
(2) How do you think markets would react if he went?
Thirty seven investors (fixed income and foreign exchange) replied to our survey and 90% remain confident of Brazil's fundamentals. In other words, and while Palocci is perceived as one of the pillars of stability in the current administration and possesses great administrative and political skills, his departure would not imply a change in policies.
Most investors believe that the initial market reaction would clearly be negative (a small sell-off) but that this would prove a good buying opportunity. Any increase in risk perceptions or weakening of the BRL would simply attract players who think that Brazil might be expensive at current levels.
The outcome of the survey appears to be a reflection of the fact that global liquidity remains abundant but also, and undeniably, that Brazil'sfundamentals have improved significantly and that regardless of who stays or goes, they will continue to do so. What the government could determine, however, by trying to put an end to the political crisis once and of all, is the pace of a further improvement in fundamentals.