Brazil gets the benefit of the doubt

These are “uncharted waters” for Latin America’s biggest economy, says the Financial Times. This is the first time a sitting president has faced criminal charges. President Michel Temer is alleged to have taken bribes from a former CEO of a large meat-packing company, JBS.

The stockmarket slipped by 10% in mid-may when the scandal surfaced, but it has since found its feet; what’s more, it is still up by 75% since January 2016. Markets apparently “no longer care about the deterioration of the country’s politics into a B-grade television crime show”, as the FT’s Joseph Leahy puts it. That’s because there is unlikely to be enough support in Congress for impeaching Temer, and he has no obvious successor. His economic team, notably the central-bank governor and finance minister, is regarded as excellent.

There should therefore still be scope for further structural reform, a process begun with a constitutional amendment to keep a lid on public spending and hence public debt accumulation. This imbroglio also proves that Brazil’s inspector general, judiciary and police are free from presidential meddling, Bryan Carter of BNP Paribas Investment Partners told “What other emerging market can boast such strong institutions?”

Of course, a positive economic backdrop makes it easier to be sanguine about a market’s prospects, and here Brazil has an encouraging story to tell. It is bouncing back from a nasty recession, while inflation at a decade low is facilitating interest-rate cuts. Foreign direct investment is pouring in, covering the small current-account deficit. Reasonable valuations help too. The market’s cyclically adjusted price-earnings ratio of ten is still one of the lowest of all major markets.