T. Rowe Price’s Gonzalo Pangaro, portfolio manager of the T. Rowe Price Emerging Markets Equity Fund, has commented on the news that Brazil’s Senate has thrown Dilma Rousseff out of office, overwhelmingly voting to impeach the country’s first female president.
Pangaro writes that investors have recently been buoyed by the prospect of regime change in Brazil, particularly as Michel Temer took the reins as interim president after the suspension of Dilma in May. The business-friendly Temer will continue as president for the remaining two years and three months of Dilma’s term.
Pangaro says: “Over the last five years, Dilma has been the driver of policies that have ultimately been harmful for the Brazilian economy and damaging for the fiscal and debt dynamics. A change in government is a first step in changing policy direction.
“Political change is needed to address the fiscal mess, with Brazil now back in a primary budget deficit for the first time in over a decade. While the commodity downturn has been unhelpful, a large part of the fiscal deterioration has been due to government mismanagement. There are risks a prolonged extension of the economic downturn could cause further deterioration of the fiscal and debt dynamics and may make monetisation of the deficit unavoidable. Inflation and interest rates would then be anchored at high levels.
“New President Michel Temer has no choice other than to move in the direction of market-friendly policies and inspire confidence of an economic revival. Social security reforms will need to be on the table as an anchor for fiscal consolidation, alongside other revenue raising measures and reforms to encourage investment.”