The inverse relationship between the political situation and economic conditions in Brazil
If someone followed closely the political crisis in Brazil for the last couple of months, but were also completely oblivious to the economic situation of the country, what would be his/her guess about Brazil’s currency value against the dollar? Bear in mind that the latest news involve the all powerful Minister of Finance Antonio Palocci and his group.
Surprisingly enough, as the figure shows, the real has increasingly gained value over the past months while the political crisis kept mounting and mounting. Why? I remember saying to Carlos Pio just before the 2002 elections that the numerous veto players present in Brazil do make economic reform very difficult. However it also can have positive consequences. In particular, if the economic conditions are reasonably good and the economic policies in place sustainable, it will be similarly hard to change.
My bet is that investors decision making follows similar lines. Yes, changing bad policies is very hard in Brazil. However, changing good policies is also hard!