Political deadlock shows Brazilian markets could get even worse

As outgoing Justice Minister Sergio Moro leveled severe accusations of political interference in the country’s Federal Police, he wasn’t only compromising President Jair Bolsonaro — but also materializing Brazilian investors’ worst-case scenario: an institutional crisis that may paralyze the country during a recession brought about by the worst pandemic in a century.

The market’s reactions to Mr. Moro’s accusations were immediate and severe. Soon after the end of his press briefing, Brazil’s benchmark stocks index, Ibovespa, crashed by 9.5 percent — hovering just above circuit-break levels. The Brazilian Real plummeted to new record nominal lows, bringing the foreign exchange ratio to USD 1 : BRL 5.74, despite the Central Bank’s U.S. Dollar auctions.

State-owned companies, often more sensitive to political shocks, followed the same route. The Banco do Brasil Bank (BBAS3) dropped by 8.3 percent, oil producer Petrobras (PETR4) dove 5 percent while energy holding Eletrobras (ELET6) plummeted an impressive 13 percent.

The panic reflects the fear of a worst-case scenario that has taken investors by storm and also the instability that lies ahead, explains Veedha Investimentos economist Camila Abdelmalack. “We have always known politics was an issue interfering with economic policies, but no one was ready for an institutional deadlock amid a global health emergency. It is a severe problem that may become a structural issue for the country. It is the last thing that could happen right now,” she said in an interview with The Brazilian Report.

But this may just be an appetizer of what is yet to come. According to one Brazil-based fund manager, the crisis will paralyze the government, likely worsening the already-sizable economic damages caused by Covid-19.  “I think we can expect a government that will perish and keep increasing expenditure, in a moment when you need the government to be aligned with Congress. This is terrible. We will be in a...