Political uncertainty and asset price volatility
Although the real has recently appreciated in parallel with the drop in the country’s CDS quotations and slight flattening of the yield curve, asset prices remain extremely volatile. That variability is partly due to the change in the international scenario, dominated by the monetary normalization initiated by the Fed, causing the dollar to get stronger. The relative depreciation of currencies has been greater in countries with balance of payment problems (Argentina and Turkey), but has also affected Brazil, due largely to its latent fiscal crisis, which can become explicit depending on the result of the presidential race in October.
The electoral outlook has changed recently. The coalition formed by the parties of the center around the candidacy of Geraldo Alckmin has reduced the pessimism stemming from the previous “consensus” that the second round would be contested by two candidates with small probability of executing the necessary agenda of reforms: Ciro Gomes and Jair Bolsonaro. This new situation has produced small favorable movements in the exchange rate, CDS quotations and slope of the yield curve. But the volatility of asset prices is still very high.
Although this volatility can be partly blamed on the international scenario, it depends much more on the domestic conditions, chiefly the latent fiscal crisis looming over the country. If the necessary reforms are enacted, principally on the fiscal side, it will be reverted before producing serious effects. In this case, the prognosis is for a gradual resumption of growth, with inflation under control. But if not handled correctly, the country will face the risk of economic deterioration, and in the worst case, convergence to fiscal dominance.
The elections are approaching, and in October that uncertainty will be “resolved”. Until then, the only forecast with a small margin for error is that asset prices will remain highly volatile.
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