Mass Public Demonstrations in Brazil this Sunday 

There are mass public demonstrations scheduled for this Sunday in Brazil. Although we don’t expect this to be a short-term market moving event, it could matter, given the ongoing risk of an impeachment process. There are two things we could learn from this Sunday: (1) the degree of organization of the grassroots opposition, and (2) a “qualitative” measure of discontent.

There are mass public demonstrations scheduled for this Sunday in Brazil. Although we don’t expect this to be a short-term market moving event, it could matter, given the ongoing risk of an impeachment process. There are two things we could learn from this Sunday: (1) the degree of organization of the grassroots opposition, and (2) a “qualitative” measure of discontent.

We already know that President Dilma is very unpopular, quantitatively speaking. The latest polls by Datafolha showed that the disapproval rating of her government reached 71%. The June survey had this number at 65%, showing how quickly her image has deteriorated. What’s important here is that this is higher than the disapproval registered for former president Collor in 1992, during the time of his impeachment. What is more, the same survey found that 63% of people polled were in favour of Congress opening an impeachment inquiry.

So the question is whether Brazilians are still angered enough to show up in mass numbers. A very large participation rate for the protests may embolden the opposition, giving them the sensation that they have a popular mandate to push for an impeachment process. This is not our base case. In fact, anecdotal reports suggest that Sunday’s protest will be smaller than past ones. That said, they seemed to be well organized and very active via social media. One of the main groups spearheading the movement, Movimento Brasil Livre, has even pre-released songs and chants for the event.

One risk is that protests turn violent. This would only worsen the political mood and heighten the sense of crisis. Aside from anti-government groups organizing the event, pro-government groups and far-right groups (in favour of a return of a military dictatorship) are also expected to participate. There were several incidences of violence and vandalism during the last protest, and Brazil has arguably only become more polarized since then.

All in all, our sense is that the political situation in Brazil is simmering down. The chance of an impeachment going through, at least through the issues relating to the government accounts, seems to be diminishing after a recent decisions by Brazil’s audit courts (TCU). Moreover, the government is trying to push a new agenda through congress, despite the usual resistance and acrimony. Regardless of its success, it at least shows that leaders are not paralyzed. So if the protests turn out on the weak side, it could even prove to be the mark of a cycle high of the political tensions for the county.

On the market side, we took the increased rollover rate of the FX swaps by the BCB as an important development. Official headwinds blowing back against further BRL weakness, along with the roughly 13.5% negative carry on USD/BRL, will go a long way to stabilizing the currency – or at least prevent it from underperforming against its EM peers. Moreover, the positive surprise of Moody’s not assigning a negative outlook for Brazil has also eliminated another source of uncertainty by pushing further back the date of the country’s possible loss of investment grade status.

Could the worse be over for Brazil? Only time will tell. But the idea that we are approaching an inflexion point is not as far-fetched as it was just a month ago.