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On Thursday May 18th/2017, Brazil’s currency: Real (R$) and stock market (Index: IBOV) took a plunge on news of a new scandal involving President Michel Temer. Investors’ reaction signals how correlated the current stock market environment is to negative political news and uncertainty.
Recall about a year ago when the country was rocked with the political scandal that led to the eventual impeachment of President Rousseff. This scandal coupled with the oil crisis caused the country’s economy to undergo a contraction. In order to tackle this, Michel Temer, introduced an economic reform program.
However, with this new found scandal of corruption, investors confidence is plagued with fear that the political sphere may continue to negatively affect Brazil’s economy.
Beyond the damaging consequences to foreign investors and companies looking to do business in Brazil; citizens are the most affected. Political scandals erode trust in government and increases political apathy.
Brazil’s current economic and political state is a reminder to investors of the risks associated to investing in emerging markets. Capital markets are always a function of the environment they operate in. It is worthwhile to compare country credit ratings to the Corruption Perceptions Index.