Political Risk Rising Again in Turkey and Brazil

The political risks in both Brazil and Turkey are rising, with an impeachment process in the former and new elections in the latter.

The political risks in both Brazil and Turkey are rising, with an impeachment process in the former and new elections in the latter.  Aside from the obvious consequences of increased uncertainty, these events could also materially exacerbate already elevated social tensions in these countries.  Investors may be complacent towards these risks because their worst-outcome results are not yet within sight.  Still, it’s important to recognize that the medium-term risks are rising.


  • The risk of an impeachment of Brazil’s President Rousseff is rising, but it’s still a tail risk.  Without getting too much into details, there are currently two constitutional paths the opposition can take to this end.  First, it can challenge the government’s 2014 fiscal accounts, with its alleged R$40 bln in creative accounting.  We think this is very unlikely to work, not least because it has been a common practice by Brazilian governments far before the current president.  The second is to link the findings from the Petrobras corruption scandal to campaign financing.  This is a far more plausible path, but it requires that a smoking gun emerges from the plea bargain statements – a huge “if,” of course.
  • Either way, we think the advancement of this impeachment process is negative for Brazil, even if it doesn’t result in a change in government.  The mere threat of impeachment undermines an already weakened government, whose approval rating (9%) is at the lowest level in 26 years.  This will further unbalance the ruling PT party’s relationship with its coalition partner, PMDP, leading to either legislative paralysis (“lame duck” government) or derailing the government’s policy agenda.  This threatens the fragile fiscal credibility that Finance Minister Levy has managed to accrue.
  • On a broader note, despite all the grievances we have with the Brazilian government’s policy choices, the impeachment road comes with a huge risk of social unrest.  It will accentuate the already sharp divisions in Brazilian society, possibly ending in violent street protests and confrontations.  One unambiguous outcome of the 2014 presidential elections in Brazil was to increase the level of political involvement in the population.  So even with its low approval rating, a large segment of Brazilians will interpret an impeachment process as a sort of coup by an opposition that failed to take power democratically.  This is not a good scenario for asset prices in Brazil – and even worse for Brazilians.


  • Headlines from Turkey’s AKP officials suggest that the risk of new elections is rising.  The party’s deputy chairman stated today that “there is no ready ground for coalition talks.”  The reason is that opposition parties are taking a tough negotiation line and making unpalatable demands to the AKP.  These include reducing President Erdogan’s influence and re-opening parliamentary investigations into corruption allegations against AKP officials.
  • In theory at least, the AKP has one big advantage: two more likely parties to join them in a coalition (the nationalist MHP and Kurdish HDP) are enemies. This means that either one has a lot to lose if the other joins a government.  To understand this, imagine the following scenario:  the historic victory by the HDP could end up paving the way for an anti-Kurdish MHP-AKP coalition, leaving the Kurds even worse off.  A similar logic applies on the other side.  This should allow the AKP to play one against the other, bargaining down their demands and increasing the chances of a coalition.  In practice, however, it doesn’t seem to be playing out this way; all three parties are holding on to a hard negotiation stand, bringing new elections closer.
  • But why would new elections results be any different this time around? What can Erdogan and the AKP do to gain an advantage?  Perhaps a military intervention in Syria aiming to attract hard-line MHP votes.  Maybe announce populist economic policies or other concessions to low-income Kurds to try and get votes from the HDP.  It’s unclear what they can do.  But whatever it is, it had to be big enough to break the stalemate.
  • Erdogan has the initiative in a zero-sum game; for him to gain, he will have to deliver a strong hit to one side – either the nationalistic right or the Kurdish left. So it’s hard to see an endgame without a further polarization of the Turkish society and rising social tensions.