Brazil’s state institutions are strong enough to survive the current “full-blown political crisis”, says Jan Dehn, an influential emerging markets investor.
Dehn – who is head of research at London’s specialist emerging markets house, Ashmore – says Brazil’s institutions are more than capable of handling the mid-term crisis that surrounds President Dilma Rousseff’s government and that they will emerge strengthened from the debacle.
Brazil’s political instability has largely revolved around corruption within the state oil company Petrobras, which has dragged on for many months and has seen calls for the president to be impeached. The crisis has affected investment in Brazil – though fund flow figures from EPFR Global last week showed that Brazil equity funds had had their best week so far this year.
In a note, Dehn writes: “The key to making the right investment decision during a country-specific crisis in EM [emerging markets] and developed countries alike often boils down to one thing and one thing only, namely making the right call on the robustness of the country in question’s institutions.”
Widespread popular protests against the administration are not a sign that Brazil’s institutions are failing, says Dehn, as the right to protest is firmly embedded within the Brazilian constitution.
“Our view is that Brazil’s political crisis will be resolved within the framework provided by the Brazilian constitution and that Brazil’s institutions are up to the job.”
If, following due process, the president is removed from office this will further re-enforce the already strong reputation of Brazil’s institutions by proving that with responsibility comes accountability, says Dehn.
In the note, he also says that emerging market governments must heed voter expectations for stability and growth, and that political accountability is critical to economic performance in emerging markets.
Successful governments, he writes, are those that respond to voter preferences for stability and growth by pursuing tighter fiscal policies, inflation targeting, accumulation of reserves and building pension systems.
“It is these very policies that have prevented EM default rates from spiking despite the shocks triggered by economic mismanagement in developed economies in the last decade and a half, including the dotcom bubble, subprime, Lehman, the European debt crisis and the Taper Tantrum.”
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