Brazil's stock market, the Bovespa, remained relatively unchanged in early trading, despite expectations it would rally following Sunday's congressional vote to impeach beleaguered president Dilma Rousseff.
The surprise reaction may have signalled a balancing out of two conflicting influences affecting the oil-dependent country. News of Rousseff's impeachment had been expected to buoy markets, but the inability of major producers to come to an agreement to cut oil production over the weekend may have held them down.
A torrid time
The congressional vote came after more than a year of protests calling for her removal. Rousseff, who leads the left-wing Workers' Party, stands accused of using accounting tricks to hide the true extent of the country's budget deficit in the run-up to the 2014 election, which she won narrowly in a second round run-off.
During her time as president, Brazil's economy has spiralled and is now enduring its worst recession in over a century.
Heavily reliant on commodities like oil and iron ore, Brazil boomed during the commodities super-cycle. Rousseff's predecessor Luiz Inácio Lula da Silva was under little pressure to diversify the economy or tighten fiscal policy. This trend continued after Rousseff came to office, with public debt reaching 60 per cent of GDP during her first term. And by the time her administration had resolved to implement austerity measures, the recession was deepening quicker than expected.
Since the start of the year, the real has appreciated, hurting the competitiveness of its exports. Last week, the International Monetary Fund said that it expected Brazil's economy to contract 3.8 per cent this year.
A political problem
Optimism over Rousseff's departure may be unfounded. If she is impeached, her potential successors, who are also embroiled in corruption scandals, may be no more able to garner the political support needed to implement deeply unpopular economic reforms.
Vice president Michel Temer, who will replace Rousseff temporarily if the Senate also votes to impeach her, stands accused of the same charges. This will make it hard for him to acquire the congressional backing needed to commit the government to securing unpopular austerity reforms, such as a budget surplus, and a move away from indexation policies on wages and pensions.
“Markets perceive any politician except Rousseff as a big positive for the economy,” says Shweta Singh, senior global economist at Lombard Street Research.“But if Temer does succeed in being president until the next election, will he have the support needed to mobilise the long list of reforms he has promised?”
“Mandated spending in Brazil needs to be cut,” says Edward Glossop, emerging market economist at Capital Economics. “But a two thirds majority is needed. Temer may have taken a market-friendly line, but it is unclear whether he has the necessary political capital to deliver it.”