The Rio Olympics have got off to a great start, but this year’s host country has largely been in the news for all the wrong reasons. The spreading of the Zika virus is a worrying development for Brazilian authorities, who are firefighting on several fronts, including corruption probes and a troubled economy
It wasn’t like this when Rio won the Olympic bid back in 2009. The country had been riding high on a boom in the price of resources and it looked as though it would soon rank among the world’s superpowers. Then President Lula da Silva was well-liked and populist politics spread across the continent.
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How sharply things have turned. Brazil is mired in the worst recession for a generation. It’s been struggling economically as the windfall from the high oil prices of the last decade came to an abrupt end in summer 2015. Black gold is priced around half what it was during the glory days, and lower revenues from oil alongside gross mismanagement by the government have combined to equal a toxic mix of high unemployment, 10 per cent inflation, dire public finances and a lack of confidence in the government.
Politically, there’s been gridlock for much of this year. Dozens of politicians and many of Rio’s business elite have been tangled in a corruption scandal that’s massive even by Latin American standards. An estimated $3bn was embezzled from state-run oil company Petrobras over the last two decades, much of which lined the pockets of dozens of politicians from five parties. The scale of the crime has disgusted ordinary Brazilians. One bribery recipient handed back $100m of ill-gotten gains, while police raids uncovered so much fine art bought with embezzled cash they put on an exhibition.
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A probe into the scandal is ongoing, but it’s largely been replaced by another sideshow: the impeachment of President Dilma Rousseff. Mass protests took place all over Brazil last year with angry citizens convinced she manipulated public accounts in order to win re-election in 2014. She’s been suspended and replaced by Michel Temer, but her removal was no silver bullet, given that virtually all her likely successors had also been touched by scandal.
STOCK MARKET SOARING
Nevertheless, Brazil’s stock market has been on a tear, and has been one of the best-performing in the world this year. In figures, the MSCI Brazil index is up 86 per cent in sterling terms over the last six months.
It’s mostly down to excitement at the prospect of political reform and hope the recession is bottoming out. Could Brazil see a new dawn?
The recent political and economic problems are a far cry from where Brazil once was, and vastly understate what it’s capable of. “The country’s economic potential is unquestionable given it is rich in commodities and with a young, increasingly educated population,” says Peter Taylor, manager of Aberdeen Latin American Income fund.
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The changing of the guard at the top of Brazilian politics can mean a fresh direction for the embattled nation, argues Will Landers, a fund manager investing in Brazil through his BlackRock Latin American investment trust.
Having made sweeping changes to leadership across the government, central bank and state-owned businesses, “Temer’s pro-market government plans to get Brazil out of the current recession, bring back fiscal discipline [and will] provide room for the central bank to cut rates aggressively once inflation is back under control,” says Landers.
The political upheaval in Brazil has been part of a wider trend in Latin America away from left-wing populism and toward reformist, broadly pro-market leadership, explains Jason Hollands of Tilney Bestinvest. “This began with the election of Enrique Nieto as President of Mexico in 2012 and last year saw pro-business politician Mauricio Macri oust controversial Argentinian President Cristina Kirchner. Venezuela, which has descended into an economic abyss with hyper-inflation and dwindling cash under its hard left regime led by Nicolas Maduro, could be the next place to embark on an impeachment process,” he says.
Unfortunately, investment markets aren’t a great predictor of political developments and in a country as troubled as Brazil, nothing will be fixed overnight. Hollands cautions against investing in specialist funds on the hopes of better governance.
For people with a longer-term view, one well-regarded investment fund which is worth looking at is the Aberdeen Latin American Equity fund, says Darius McDermott of Chelsea Financial Services.