Brazil's latest political shake-up is horrible news for its economy

The Brazilian real has rallied sharply since the beginning of March amid hopes massive government protests would lead to the end of President
Dilma Rousseff’s political career.
But things have not worked out that way.

Instead, Rousseff’s political power seems to have strengthened — at least temporarily — with her appointment of former President Luiz Inacio Lula da Silva as her chief of staff.

By naming Lula to this position he’s been granted immunity from every court, except for the Supreme Court, giving him a bit of protection from money laundering and fraud charges related to the Petrobras probe.

Rousseff hopes that adding the beloved Lula to her cabinet will help secure enough votes to avoid impeachment.

Of course the people of Brazil think otherwise. Thousands of Brazilians took to the streets on Wednesday, protesting Lula’s appointment and calling for Rousseff to resign.

But it seems as though Rousseff plans to do whatever it takes to cling to power, and that’s terrible news for the economy. It has been in free fall with activity contracting 8% year-over-year in January, making for an 11th straight monthly decline.

Additionally, economists expect Brazil’s GDP to contract by 3.5% in 2016, and estimates keep being revised lower. And with the Rousseff government likely to stay in power, prospects for a turnaround in its economy are low.

Taking all of this into account, HSBC thinks the real’s rally is over.

The firm projects the currency will slide 15% from here to 4.20 per dollar by mid-year, as the Brazil economy “is struggling in its worst recession in decades, unemployment and the debt to GDP ratio are both rising, inflation is still uncomfortably high and there is low political appetite for structural fiscal reform.”

The only thing the real has going for it is that Brazil balance of payments look pretty good, its current account deficit is shrinking, and the country’s high interest rates will provide some protection, HSBC says.

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