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Management in Practice

Will Brazil’s Markets Survive Its Politics?

A political crisis plus a major recession have raised serious questions about what’s next for Brazil’s economy. Arthur Mizne ’95 argues that effective financial institutions and transparent public markets bode well for Brazil’s future.

Brazil hasn’t had an easy go of it recently. During the 10-hour vote to impeach the president for hiding gaping holes in the country’s budget, there were brawls among members of the lower house of congress. The drama was part of a wide-ranging corruption scandal that has also seen former president Lula da Silva charged with taking dirty money associated with the still unfolding multi-billion dollar Petrobras scandal. The collapse of commodity prices has plunged Brazil into its worst recession in 25 years. On top of that, the mosquito-borne Zika virus has hit parts of Brazil hard.

The country is a center of attention around the world as it prepares to host the Olympics this summer. But the question of what will happen next in Brazil has implications beyond the stadiums and pools where athletes will compete this summer. Brazil has also become an increasingly important part of global markets. Over the last decade, global markets have poured investment into the country, which has had an average capital inflow of $80 billion during that period. While emerging markets overall were hit hard in 2015, with $755 billion in net outflow, Brazil was a relative bright spot among the BRICS nations, with $52 billion of net inflows. However, the Institute of International Finance estimates that it will be much closer to neutral in 2016, with just $6 billion of inflows.

A number of observers argue that Brazil has financial institutions that are strong enough to sail through the storm. “Brazil is facing a dark moment in its history, but nothing indicates that the country will implode,” Moises Costa noted in Foreign Affairs. “If Brazil continues to flex its institutional muscles, it may create enough momentum for real reforms.”

There is precedent for Brazil making good from bad. When a number of the country’s big banks failed in the early 1990s, the country “assumed a conservative position concerning prudential financial regulation,” according to a Journal of Economic Studies paper which found that the reformed regulatory regime then helped Brazil through the 2008 global financial crisis.

An overview of the BRICs in the Journal of Private Equity cited Brazil as the most balanced and self-sustaining of those economies. Though privately held firms don’t consistently follow international norms, “with respect to public markets, there is a propensity for strict corporate governance practices and standards, including higher levels of financial transparency (GAAP or IAS reporting), minority shareholder protections, and external directorship.”

Arthur Mizne ’95, CEO of Brazilian hedge fund M Square Global Investimentos, talked with Yale Insights about the state of Brazil’s markets and its economic future. Despite the scandals and economic recession, “I would say the system is quite safe,” Mizne said. “The financial institutions in Brazil are very solid, and the main reason for that goes back to the regulatory system that we have.”

Brazil suffered terrible inflation in the 1980s and 1990s. At times the rate of inflation topped 70% a month, Mizne recalled. As a result, the central bank was given strong oversight capabilities. As for equity markets, “if you compare Brazil to other emerging markets, it's even more transparent than you would expect,” Mizne said. “Brazil has a very, very developed regulatory body. There are significant compulsory disclosures required of companies, mutual funds, and even hedge funds.”

Mizne also argues that a lot of the foreign investment in Brazilian equities is long-term money. “They want to have some exposure to Brazil. They know it's volatile,” he said. For evidence, he points to the fact that even in the current crisis, “we're not seeing a lot of outflows from equities, from foreigners selling.”

While he thinks markets will sail on, he doesn’t think it will always be smooth sailing. Mizne sees the need for further economic reforms, including changing the tax system and labor laws with their “very ancient and very problematic mechanics.” Given the current political chaos, he doesn’t expect action soon, but it can’t be put off indefinitely. “At some point the government will have to take measures to fix the economy,” he said. “That will be probably recessionary, at least initially, although I'm sure it will come with relief that the right things are being done.”