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It Will Take Years for Brazil to Recover From Corruption and Scandal

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Monday, 18 Apr 2016 11:06 AM Current | Bio | Archive


The Brazilian House of Representatives has voted to impeach President Rousseff, so some enthusiastic reaction in the markets is plausible.

I’d like to add here investors shouldn't get too excited by hoping for a rapid change in Brazil for the better.

It's also better not to overlook the Senate should give its final vote by mid-November if all goes as expected for the moment.

It could also be helpful not to forget President Rousseff was a leftist President who helped found the Democratic Labor Party (PDT) and any move by her successor will be scrutinized by the syndicates, and believe me that will be something.

In my opinion, Brazil hasn’t touched the bottom yet and it will take several years to repair all the damage that has been caused by corruption, mismanagement, lies, and so on...

By the way, of the 65 members on the impeachment commission, 37 face charges of corruption or other serious crimes. Of the 513 members of the lower house in Congress, 303 face charges or are being investigated for serious crimes and in the Senate, the same goes for 49 of 81 members according to data prepared for the Los Angeles Times.

Brazil isn’t out of the woods yet, no, not by a very long shot.

Brazil-related long-term investing should better wait, at least that’s what I think.

Meanwhile, perhaps oil markets didn’t pay sufficient attention to what the Saudi kingdom’s deputy crown Prince Mohammed bin Salman said last Thursday at King Salman’s private farm in Diriyah, which is the original home of the Al Saud royal family: “If all major producers (of course that includes Iran) don’t freeze production, we will not freeze production … if we don’t freeze, then we will sell at any opportunity we get.”

We know markets have a short memory, but in fact, what happened in Doha is about the same as what happened on December 4, 2015 in Vienna, Austria, when the OPEC-members failed again to agree on an output cut.

At that time, Saudi Arabia had made the cut conditional to:
  • The cut would need to include countries outside of OPEC, such as Mexico, Russia, Oman and Kazakhstan.
  • Iraq would need to freeze production at its current level at that time that was about 4.3 million barrels per day.
  • Iran would needed to participate in the production cut.
No wonder oil prices are falling sharply in the wake of the failure of the Doha conference of oil producers to agree on what was called an oil production freeze.

It’s interesting to see how many seem to be surprised, but failure to agree is not exactly unheard of in the world of oil production.

Indeed, the first and really one of the very few solid OPEC agreements that was complied with was when in October 1973 the Arab members of OPEC, plus Egypt and Syria, proclaimed an oil embargo that resulted in the first oil shock (followed in 1979 by the second oil shock) and that resulted in an oil price rise from $3 per barrel to nearly $12 per barrel globally and WTI, which had most of the time been more expensive, ending up at about $50 per barrel (!) by March 2014.

However, as we know, for Doha there had been expectations for some kind of deal, a deal that would subsequently be reneged upon, no doubt about that, but at least something.

The failure to even have a target has led to the price decline. So oil markets are back a the weaker range where they were before Doha implied hope.

Once again, weaker prices are back in the cards, which is important for long-term investors as well as speculators.

However, the moves in the oil price do also have a bearing on global capital flows. Less oil revenue for oil producers creates fiscal problems and the desire to dip into the store of wealth build up in central banks and sovereign wealth fund reserves in recent years. It is after all what a sovereign wealth fund is for, isn't it?

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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HansParisis
No, Brazil isn’t out of the woods yet, no, not by a very long shot. Brazil related long-term investing should better wait, at least that’s how I think about it.
brazil, oil, crude, economy
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2016-06-18
Monday, 18 Apr 2016 11:06 AM
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